January 23, 2020 Payroll en_US When done right, tip pooling can improve morale and fairly compensate all your employees. But there are several legal concerns you need to understand. https://quickbooks.intuit.com/cas/dam/IMAGE/A7NoQuAjW/1bfbc3175ad7776674cc494be3fece64.jpg https://quickbooks.intuit.com/r/payroll/tip-pooling-laws-policy/ Tip pooling: Know the law before creating a company policy
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Tip pooling: Know the law before creating a company policy

By Cathie Ericson January 23, 2020

If you run a restaurant or other business where tipping is prevalent, you’ve likely wondered if you should consider a tip-pooling policy. After all, tip pooling could potentially offer numerous benefits from increased teamwork to better customer service.

However, instituting a tip-pooling policy is not something you should do on a whim. There are state and federal laws that exist to protect tipped employees. You should do your research beforehand to make sure you’re creating a valid tip pool.

In this article, we’ll cover everything you need to know about tip pooling arrangements. We’ll go over what tip pools are, which businesses can implement them, and the pros and cons of doing so.

Lastly, we’ll touch on tip pooling regulations to help you better understand how to legally implement one of these policies in your small business.

What is tip pooling?

The practice of tip pooling means that a group of employees at an organization share the tips that they’ve made individually. Employees’ tips are “pooled” together and then distributed evenly amongst everyone.

A bustling restaurant provides a perfect illustration of how tip pooling can be beneficial. Let’s say you’re having dinner at a restaurant. Typically, the waiter or waitress is the “upfront” person — the individual who you interact with the most.

But this person’s ability to provide an excellent customer experience is bolstered by restaurant staff including:

  • The cook who prepared the customers’ entrées
  • The bartender who made their cocktail
  • The host who seated them at their favorite table
  • The busser who cleaned the table
  • The supporting kitchen staff who prepared ingredients or plated meals
  • The food runner who delivered the hot meal

It’s hard to argue that each of these restaurant employees didn’t play a role in the meal, 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 and make sure they are satisfactorily performing their role.

What kind of businesses participate in tip pooling?

Most businesses that would take part in tip sharing are industries where tipping is the norm — primarily the hospitality industry, which includes establishments like 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 is 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, barbacks, dishwashers
  • Hotel front-of-house employees: guest services attendants, bell personnel, concierges, room cleaning crews
  • Hotel back-of-house employees: janitors, laundry crew

Just because you tip someone doesn’t necessarily mean that the business participates in tip pooling. For instance, if you go to a barber for a haircut, you may tip a few dollars.

However, this is the only individual who provided you with the service. There are no “front of the house” or “back of the house” employees for a routine haircut. So in this case, there probably isn’t a tip pooling system in place. What you see is what you get.

But let’s say you go to a barber and have multiple services done. Perhaps one person cuts your hair, another highlights it, and a third person shampoos it. When leaving, you provide a tip. In this case, tip pooling may take place since multiple people had a hand in your experience.

So as a rule of thumb for business owners, if you provide a service that requires the participation of multiple employees, you may want to consider tip pooling.

To pool or not to pool?

If you work in the service industry, you may be wondering whether tip pooling is right for your business.

There are a few legal ramifications that go along with tip pools, which we’ll detail below. But for now, we’ll look at some of the general pros and cons of instituting a tip-pooling policy.

The main benefit of tip pooling is that it instills a culture of teamwork where one job isn’t perceived as more important or lucrative than another. For instance, imagine you don’t tip pool.

Why would the bartender work just as hard for someone in the dining area as he or she would for someone seated at the bar? The bartender’s service at the bar impacts their personal tips while their service for the dining area impacts another person’s tips.

If you pool tips, you instill a belief that all jobs are important and that working harder and treating all customers fairly can lead to more lucrative gains for everyone, not just one or two employees.

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

Why would employees work harder if they know most of the funds are going to be taken away from them? If the waiter would make $20 without tip pooling but $10 with tip pooling, what incentivizes them to provide excellent service?

Perhaps you pay your non-tipped employees more than your tipped employees, knowing that tipped employees will earn their fair share by the end of their shift. But if you pay all employees close to the same and are looking for a fair, collaborative environment, tip pooling can be the solution — provided, of course, you have followed applicable local tip pooling laws.

What are the tip pooling laws you need to know?

So far, tip pooling has seemed pretty straightforward. But where it gets tricky is in the 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, is often up to the owner. However, state laws also play a role in determining this. As this map from the U.S. Department of Labor (DOL) shows, some states, particularly on the west coast, don’t allow tip credits at all.

States that require employers to pay employees the full state minimum wage before tips include:

  • Alaska
  • California
  • Hawaii
  • Minnesota
  • Montana
  • Nevada
  • Oregon
  • Washington

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. This is an update to the U.S. DOL’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 ordinarily receive more than $30 in tips per month. If you take a tip credit for bartenders or wait staff, these individuals should not have to tip share with non-tipped employees (those who you aren’t taking a tip credit for).

While you as the employer might believe that tip pooling will raise the bar on service, some employees 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 position of “supervisor” or “manager” is determined based on the DOL duties test.

Under the duties test, a person qualifies 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, another stipulation to the rule is that owners must inform employees of the pool’s existence and the format by which the pool will be distributed, such as hours worked.

Finally, make sure to check any new state laws that might include tip pooling laws specific to your area.

Check your state’s Department of Labor website to get the details on tip pooling laws that apply to you. Hiring a trusted attorney could also help ensure you are compliant with state and federal laws.

How to implement a tip pooling policy template

If you’ve decided that you want to implement a tip pooling program in your small business, you’ll want to figure out the best way to go about doing so.

So long as you follow federal and state laws, companies have flexibility in determining how they can run their pools. Below is a skeleton outline of things you should consider when instituting tip pools.

1. Decide on the metric for splitting tips

Options include an even split among all employees, a proportional split according to customer service time with more going to servers and bartenders, or a set percentage breakdown — for example, 10% to the chef and 25% percent split among the rest of the back-of-house staff.

Calculating customer service time could be as simple as dividing the tips by the total hours worked for employees, weighing customer-facing hours more highly. Consider the equation:

(1.10(x) + y) ÷ z = a

In this scenario,

  • A = per-hour tip
  • X = hours worked for customer-facing employees
  • Y = hours worked for non-customer-facing employees
  • Z = total tips

In this example, customer-facing employees earn 10% more than non-customer-facing employees. You can figure out the per-hour tip amount and then multiply it by 1.1 to figure out how much customer-facing employees should earn.

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% to process the fee, the employer may take that percentage from the tip, effectively making the tips to be pooled 96.5% 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

Here are a few key tips to help you remain compliant:

  • If you work on a tip-credit basis, you may only count the amount an employee actually receives from the tip pool toward your tip credit.
  • 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 in your tip credit.
  • Remember that managers and supervisors are not allowed to participate in the tip pool.

Always check with your state and local tip pooling laws to make sure you aren’t in violation.

4. Communicate your policy

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.

As a final tip, wise leaders always include their staff in the decision-making process. This is especially important so your new policy 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. Avoiding miscommunication is crucial when instituting a new policy for your business.

Are tip pools right for your business?

When done effectively, tip pools could be a worthwhile addition to a business. There is no black-and-white answer as to whether they’re an ideal fit for your company, though.

If you’re considering a tip pooling arrangement, the most important thing to remember is that you do your research.

Brush up on state and federal laws regarding tip pools, consult an attorney for additional guidance, and talk with your employees to figure out what they think of the plan.

As is the case with any significant change to your business, diligence and preparation are key. Taking your time will allow you to determine whether tip pooling is right for your company.

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Cathie Ericson is a freelance writer who specializes in small business, workplace issues, personal finance and health. She lives in Portland, Ore. @CathieEricson Read more