March 27, 2019 Payroll en_US Is tip pooling right for your business? What are the laws? How do you create a winnin policy? Here’s everything an employer need to know. Tip pooling, tip pool laws, and how to create a policy that works for your business

Tip pooling, tip pool laws, and how to create a policy that works for your business

By Cathie Ericson March 27, 2019

If you run a restaurant or other business where tipping is prevalent, you’ve likely wondered if you should a tip-pooling policy. After all, it offers a number of benefits, from increased teamwork to better customer service. On the other hand, you’ve probably wondered what tip pool laws exist and if there are potential pitfalls.

Here’s everything you need to know to decide whether tip pooling is right for your business.

What is tip pooling?

The practice of tip pooling means that all employees at an organization share a portion of the tips that they have made individually in a collective fashion.

A bustling restaurant provides the perfect illustration of how tip pooling can be beneficial. Yes, there is typically one person who does most of the “up front” service, but their ability to provide excellent customer experiences is bolstered by restaurant staff on many layers:

  • The cook who prepared their entrée
  • The bartender who made their cocktail
  • The host who seated them at their favorite table
  • The busser who cleaned the table so everything was ready
  • The kitchen staff supporting prepared ingredients or plating meals
  • The runner who delivered the food hot; and of course, the clean-up crew

It’s hard to argue that each of these workers didn’t play a role in the excellent service a customer received, and yet, often only the waiter receives a gratuity.

With tip pooling, every person who interacts with customers—and in some states, every employee involved in the transaction at any level—will receive part of that extra pay, encouraging them to step up to make sure they are satisfactorily performing their role.

What kind of businesses participate in tip pooling?

Most business that would take part in a tip pool are industries where tipping is the norm—primarily the hospitality industry, such as restaurants, coffee shops, and hotels.

These businesses have both “front of the house” employees—those who work directly with guests—and “back of the house” employees—those who serve as support.

This distinction becomes important when it comes to tip pooling laws.

Typical examples of “front of the house” and “back of the house” employees include:

  • Restaurant “front of house” employees: Greeters, servers, bartenders, food runners, bussers
  • Restaurant “back of house” employees: Cooks, chefs, bar backs, dishwashers
  • Hotel “front of house” employees: Guest services attendants, bell personnel, concierges, room cleaning crews
  • Hotel “back of house” employees: Janitors, laundry crew

What are the tip pooling laws you must know? Tip credits

So far tip pooling has seemed pretty straightforward. But where it gets tricky is in differences that arise based on whether you take a tip credit or whether you pay your employees the full minimum wage. This can impact how you run payroll for your business.

The decision to take a tip credit, which means you pay employees less than the minimum wage with the expectation that their tips will make up the difference, varies in some cases by personal choice—what you as the owner prefer to do—but also by state law, as some states, particularly on the west coast, don’t allow tip credits at all.

If you are an employer who does not take a tip credit—that is you pay the full minimum wage whether because of state law or personal choice—then you can include “back of house” employees, such as cooks and dishwashers, in your tip pool, an update to the U.S. Department of Labor’s “Fair Labor Standards Act (FLSA) as of March 2018.

If you do take a tip credit out of employees’ wages, then your tip pool can only include the customer-facing employees who would “customarily and regularly receive more than $30 per month in tips.”

While you as the employer might believe that tip pooling will raise the bar on service, some employees (and here, we mean the ones receiving the most tips!) might feel otherwise.

However, you have a legal right to insist that your employees participate in tip pooling, assuming you meet the other requirements.

It’s important to note that tip pooling laws prohibit employers, managers and supervisors from participating in the tip pool. The level of “supervisor” or “manager” is determined based on the “duties test,” meaning which they qualify for supervisor or manager status if they are exempt under the overtime rule, supervise at least two other employees and have the authority to make hiring and firing decisions.

Additionally, you must inform employees that they are participating and the format by which the pool will be distributed, such as hours worked.

Finally, make sure to check any additional state laws that might cover tip pooling laws specific to your area. Check your state’s Department of Labor website to get the details on tip pooling law that apply to you.

To pool or not to pool?

Legal ramifications aside, you might still be wondering if tip pooling is a wise idea for your business.

The main benefit of tip pooling is that it instills a culture of teamwork where one job isn’t perceived as more important (read: lucrative) than another. It also allows employees to more equitably divvy up less-desirable tables or shifts so that all your customers receive excellent service.

Of course, there can be drawbacks as well, specifically that servers may hesitate to go above and beyond if they feel that they won’t be recognized for exemplary efforts.

But if your goal is a more collaborative environment, tip pooling can be the solution—provided of course you have followed applicable local tip pooling laws.

How to implement a tip pooling policy template

1. Decide on the metric for splitting tips.

Options include:

  • An even split among all employees
  • A proportional split according to direct customer service time
  • A set percentage breakdown—for example, 10% to the chef and 25% percent split among the rest of the staff

2. Factor in credit card fees.

By law in most states, an employer can deduct the amount of the credit card fee from the tipped amount. For example, if a credit card company charges an employer 3.5 percent to process the fee, the employer may take that percentage from the tip, effectively making the tips to be pooled 96.5 percent of the total that was left. Again, double-check with your own state law.

3. Make sure your tip pool accounting is within the law.

A few key pointers:

  • If you work on a tip credit basis, you may only count the amount an employee actually receives from the tip pool.
  • If that’s not enough to meet the minimum wage requirement for your state, you must make up the difference.
  • Service charges, often imposed on larger groups, do not count as a tip and cannot be included.
  • Remember that managers and supervisors may not participate in the tip pool.

Always check with your state and local tip pooling laws to make sure you are in compliance.

4. Communicate your policy.

As a final step, be sure to share your new policy verbally and in writing with all employees. It’s not just a good idea; it’s a tip pooling law.

In fact, as a final tip, wise leaders always include their staff in the decision-making process itself. This is even more important so it doesn’t feel like a surprise. Share your intentions. Share your thinking. Share the benefits. Get feedback. And give your employees plenty of time to prepare for whatever the changes might be.