Tip Pooling Laws: How to Protect Your Tips as a Hospitality Worker

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Under guidance from the Biden administration, the DOL announced that parts of the Final Rule governing the treatment of tipped employees under the Fair Labor Standards Act will take effect on April 30, 2021, while other parts will be further revised. The following provisions of the Final Rule will take effect on April 30, 2021:

• Managers and supervisors are prohibited from receiving or keeping employees’ tips, including from a tip pool.
• Employers that do not take an FLSA tip credit may now include a broader group of workers, such as cooks or dishwashers, in a mandatory tip pool.

As the hospitality industry looks to recover from COVID-19 restrictions, the focus tipped workers in today’s rapidly changing workplace has never been more intense. Opening tip pooling to back-of-house employees is a significant change that will impact

What Is Tip Pooling?

Tip pooling is a practice used at some restaurants and hotels where all tipped workers at the establishment will contribute some or all of their tips into a pool. The tip pool is then distributed among a group of employees that may be larger than the employees that contribute. Tip pooling allows tips to be allocated across front-of-house workers and in some cases back-of-house workers may also be included. Tip pools are commonly allocated based on percent, hours worked, or even more complicated points systems.

How Tip Pooling Works

Tip pooling is intended to level the playing field and to provide some stability by having an equitable distribution of tips based on a predetermined system. When each member of the team knows that they will receive their share they are more motivated to improve the experience for every guest and not only the ones that they are serving directly.

One of the simplest versions of tip pooling is frequently seen at counter-service restaurants like sandwich bars and coffee shops. The tip jar at the register is combined with tips paid by credit card and the total tip pool is distributed equally to all workers at the end of the shift.

One obvious drawback to the even-split tip pool is there will be instances when not everyone works the same number hours, which leads to the next example where tips are split based on the hours worked. In this system the total amount of tips earned is divided by the total number of hours worked to calculate the tips earned per work hour. Each employee then multiplies by their individual hours worked to find their portion of the tip pool.

Example – Split the Tip Pool Based on Hours Worked

• List out the hours worked by each employee
  • Server1 worked an 8-hour shift
  • Server2 worked a 4-hour shift during the dinner rush
  • Server3 worked a 6-hour shift
  • Server4 worked an 8-hour shift
• Total hours worked = 8+4+6+8=26 hours
  
• The total tips earned was $600
• Tips earned per work hour = $600/26 hours = $23.07/hr
  
• To calculate each employee’s take-home tips simply multiply the tips earned per work hour times the number of hours they worked.
  • Server1: 8 hours x $23.07/hr = $184.56 take-home tips
  • Server2: 4 hours x $23.07/hr = $ 92.28 take-home tips
  • Server3: 6 hours x $23.07/hr = $138.42 take-home tips
  • Server4: 8 hours x $23.07/hr = $184.56 take-home tips
    
• To verify the calculations are accurate simply sum each server’s take-home tips to verify it matches the total in the pool.
  • $189.60 + $92.28 + $138.42 + $189.60 = $599.82 ≈ $600.00
    (note that some discrepancy is normal due to rounding errors but it should be less than one dollar)

Splitting the pool works well when everyone has an equal role in customer satisfaction, but for more complicated arrangements a points system is frequently used that also takes into account the workload of each role. Using a points system allows the company to fairly distribute tips among all employees – including back-of-house staff that doesn’t normally receive tips – and keep their establishment running smoothly. In a points-based tip pooling system, each role is assigned a point value per hour which determines their weighted percentage of the overall tip pool.

Example – Split the Tip Pool Using a Points System

• Calculate the total points for each role:
• Servers earn 10 points per hour
  • Server1 worked 8 hours: 8 x 10 = 80 points
  • Server2 worked 7 hours: 7 x 10 = 70 points
  • Server3 worked 5 hours: 5 x 10 = 50 points
• Bartenders earn 8 points per hour
  • Bartender1 worked 9 hours: 9 x 8 = 72 points
  • Bartender2 worked 4 hours: 4 x 8 = 32 points
• Runners earn 6 points per hour
  • Runner1 worked 8 hours: 8 x 6 = 48 points
• Dishwashers earn 3 points per hour
  • Dishwasher1 worked 8 hours: 8 x 3 = 24 points
• Hosts/hostesses earn 2 points per hour
  • Hostess1 worked 8 hours: 8 x 2 = 16 points
• Sum all of the points together to get the total points
  • Servers (80 + 70 + 50) + Bartenders (72 + 32) + Runners (48) + Dishwashers (24) + Hostess (16)
  • 80+70+50+72+32+48+24+16= 392 total points
    
• The total tips earned was $1200
• Tips earned per point = $1200/392 points = $3.06/point
  
  
• Now calculate each employee’s take-home tips by multiplying the tips earned per point times their number of points:
  • Server1: 80 points x $3.06/point = $244.80 take-home tips
  • Server2: 70 points x $3.06/point = $214.20 take-home tips
  • Server3: 50 points x $3.06/point = $153.00 take-home tips
  • Bartender1: 72 points x $3.06/point = $220.32 take-home tips
  • Bartender2: 32 points x $3.06/point = $97.92 take-home tips
  • Runner: 48 points x $3.06/point = $146.88 take-home tips
  • Dishwasher: 24 points x $3.06/point = $73.44 take-home tips
  • Hostess: 16 points x $3.06/point = $48.96 take-home tips
    
• To verify the calculations are accurate simply sum all of the take-home tips to verify it matches the total in the pool.
  • $244.80 + $214.20 + $153.00 + $220.32 + $97.92 + $146.88 + $73.44 + $48.96 = $1192.52 ≈ $1200.00
    (again some small discrepancy due to rounding errors is expected)

As you can see, even this rather simple example of points-based tip pooling quickly gets complicated. Many tip pools will also include other factors in the calculations and additional roles – the possibilities for complexity are endless. Businesses that implement tip pooling will frequently utilize a spreadsheet to automatically calculate the points and take-home tip amounts for each employee.

The Benefits of Tip Pooling

• Tip pooling spreads the wealth across the staff. When implemented properly, pooling tips functions as an equalizer that makes compensation more balanced across the entire team rather than concentrating gratuities in just a few roles.
• Tip pooling increases the sense of responsibility. Members know that their actions can directly affect the tip amount the team receives and are more likely to give their attention to side work (refilling table condiments, sanitizing menus, restocking server stations, and keeping all areas clean and tidy) that improves the total customer experience.
• Tip pooling can increase teamwork and employee morale. Instead of simply putting in the hours until the end of shift, members that don’t normally receive tips directly are encouraged to work together and increase productivity. When one area gets busy the other staff are more likely to help out to keep everything running smoothly and keep guests happy.
• Tip pooling reduces drama. Without tip pooling, there is intense competition amongst servers for the best tables and the best shifts. Tip pooling eliminates bad tables and reduces the impact of working a slow afternoon shift with few guests.
• Tip pooling increases back-of-house wages and incentivizes the kitchen crew. When back-of-house wages are a fixed rate the cooks earn the same whether they keep guests waiting for their order or if they keep up with the lunch rush and deliver dishes with speed and accuracy. When all of the service staff earn a portion of the tips they are motivated to higher performance and to provide high levels of customer satisfaction.

The Drawbacks of Tip Pooling

• Tip pooling can cause staff to feel unequal. Any system that allocates tips can cause resentment. The goal of tip pooling is to ensure all staff members are fairly compensated for their work but not everyone will agree on what is fair. Even the most thoughtfully designed system can cause some members to feel resentment that other roles receive more points in the pool or a higher percentage of the tips.
• Tip pooling reduces take-home pay for high-performing servers and bartenders. Tip pooling inevitably means that some members see their take-home tip amount reduced. High-performing servers and bartenders earn their tips by busting their butt and having skills that stand out from the crowd. They are less likely to stick around when they see the fruit of their effort redistributed to a team that they see as putting in less effort and commitment.
• Tip pooling requires record keeping. The more complicated the tip pooling system the more time that must be spent tracking tips and other factors, which means less time performing other tasks that may be more valuable.
• Tip pooling can obscure low performers. Some employees will see tip pooling as an opportunity to put in less effort and still make the same amount. This can cause hard-working employees to resent the entire system or even to reduce their own effort.
• Customers may object to tip pooling. When a customer has an amazing experience and leaves a generous tip they expect that tip will go to their server. Customers may feel misled and complain when they learn that their tip is instead distributed to members that didn’t interact with at all.

Tip Pooling vs Tip Sharing

Many servers and bartenders are familiar with the concept of tip sharing, also called tipping out, where they will share a percentage of their tips with other co-workers that indirectly assist them. Employees who directly receive the tips pay a percentage of their tips to other front-of-house employees who assisted with service. Typically this means that servers will share tips with bussers, runners, the bar, and host staff while bartenders will share tips with barbacks.

Unlike tip pooling, tipping out does not involve an equal distribution of tips among employees but instead follows a percentage distribution that is generally recommended by the employer. The tip-out policy defines a pre-set percentage (based on tips, sales, or categories).

For example, at a steakhouse, a server may tip-out 15% to the bartender that made their drinks, 8% to the busser that cleared their tables, 7% to the runner who brought out the food, and 5% to the host who greeted and seated the guests. In this example, if the server earned $200 in tips during their shift they would keep $130 (or 65%) while the other $70 would be distributed to the team that helped them provide a great customer experience.

Unlike tip sharing, tip pooling ensures that each member of the team receives an equal portion of the tips received – based on their role and hours worked..

Is Tip Pooling Legal?

Tip pooling is allowed by the Fair Labor Standards Act (FLSA) and all states allow some form of tip pooling. All employees required to participate must contribute a portion of their tips into the pool and the resulting tip pool is then divided among a group of employees. All but five states allow employers to require tip pooling by their employees.

Employers are required to inform employees of the tip pool in advance, employees can’t be required to contribute more to the pool than is “customary and reasonable”, and after the tip pool is distributed all employees must receive at least the full minimum wage for their hours worked.

Changes for 2021: Under guidance from the Biden administration, the DOL has announced (source) that parts of the Final Rule governing the treatment of tipped employees under the Fair Labor Standards Act will take effect on April 30, 2021, while other parts will be further revised. The following provisions of the Final Rule will take effect on April 30, 2021:

• Managers and supervisors are prohibited from receiving or keeping employees’ tips, including from a tip pool.
• Employers that do not take an FLSA tip credit may now include a broader group of workers, such as cooks or dishwashers, in a mandatory tip pool.

Under the FLSA, employers that claim a tip credit are only allowed to include employees in the tip pool that normally receive tips – typically these are front-of-house staff.

States With Additional Restrictions on Tip Pooling

Currently five states – Kentucky, Minnesota, Montana, New Hampshire, and Wyoming – only allow tip pooling if the employees agree to it voluntarily. Employers in these states are not allowed to require tip pooling. An employer may inform employees that there is a voluntary pool, but may not make it mandatory for employees to contribute to the tip pool.

California: As with everything employee-related in California, it gets complicated. Mandatory tip pooling is permitted in California when the participants are all front-of-house staff that directly participate in the “chain of service”. However, in February of 2016 the Ninth Circuit Court of Appeals sided with the US Department of Labor in saying that tips can not be shared with cooks and dishwashers since they are not “customarily” tipped by customers. (Oregon Restaurant & Lodging Assoc. v. Perez). The question of who can participate in tip pooling in California must be evaluated on a case-by-case basis.

Tip pools in California must be distributed in a fair and reasonable manner, generally with the largest portion going to the server and smaller portions going to other support staff. The California Department of Labor Standards Enforcement has found the distribution of 80% to wait staff, 15% to bussers, and 5% to bartenders to be fair and reasonable in a traditional restaurant setting.

Delaware: Employers in Delaware employer may require direct service establish a tip pooling or sharing system but limits their contribution at 15% of the primary direct service employee’s gratuities. 19 DE Statute 19-902(d)(2)

Delaware law also allows employees to set up their own tip pooling system with the rules determined by the employees who participate. These tip pools must be voluntary, employers may not coerce or require employees to create the pool nor to participate.

District of Columbia: District of Columbia law allows tip pooling, but only among employees who customarily receive tips. DC Code 32-1003(g)

Indiana: Employers in Indiana may require that tips/gratuities be pooled as a mechanism for ensuring that gratuities are shared by all employees in the chain of customer service.  Employees can’t be required to share their tips with employees who don’t usually receive their own tips, like dishwashers or cooks.

Massachusetts: Tip pools in Massachusetts are restricted to only employees that interact with customers are receive tips directly. MGL c.149 § 152A prohibits tip pool distribution to any person who is not a wait staff employee, service employee, or service bartender.

New York: Employees in New York can only participate in a tip pool if they directly provide service, or assist in serving customers within the main responsibilities of their job. Under the Hospitality Wage Order, only food service workers may receive distributions from the tip pool. Eligible employees must personal service to patrons at a level that is a principal and regular part of their duties and is not merely occasional or incidental. Cooks, dishwashers, and other back-of-house staff can not participate in the tip pool.

North Carolina: North Carolina law (13 N.C. Admin. Code 12.0303) allows employers to implement mandatory tip pooling. Only employees who customarily and regularly receive tips may participate in the pool and tipped employees must retain at least 85 percent of the tips they receive.

North Dakota: Tip pooling is allowed only among the tipped employees in North Dakota. A vote of tipped employees to allow tip pooling must be taken, and fifty percent plus one of all tipped employees must approve it. ND Admin. Code 46-02-07-03(2)

Utah: Utah employers must inform tipped employees in writing of the terms of the tip pooling or tip sharing arrangement before the employees are required to participate in the arrangement. Tip pooling may only include employees who customarily and regularly receive tips either directly or via the tip pooling/sharing arrangement and may not include dishwashers, chefs, cooks, or janitors. UT Admin. Rules 610-1-4(d)(f)(g)

Employers in California, Washington, Minnesota, Alaska, Oregon, Nevada, and Montana must pay every employee the same base minimum wage and are not allowed to take tip credits.