What Restaurants Need to Know About Tip Pooling

It goes without saying that the restaurant industry thrives on tips. Although tip payouts are not required, it is a widely accepted norm in the U.S. that guests leave the server a percentage based on their total bill. Therefore, it’s no secret most servers in the restaurant industry rely greatly on tips as a part of their income. Of the approximately 4.3 million employees that rely on tips, 60% are servers and bartenders.

All tips that are paid out must also be tracked and reported accurately, which can be a stressful process for many restaurant owners to manage. With many state and federal regulations on tip payouts and wages that often go unreported, this can be a tough arena to navigate.

To help manage the tip payouts in an efficient way, many employers decide to adopt a Tip Pooling or Tip sharing policy, but with ever-changing laws, these policies can be difficult to unpack. For those enforcing a policy, here’s a breakdown on the basics:

What qualifies as a tip and who is considered a tipped employee?

  • Tip: this is a sum of money given to the employee that is an addition to the service provided. Common tip payments include cash and credit card payments.
  • Tipped employees: are qualified as those who earn at least $30 in tips each month. The IRS requires employees to report out on any tips of more than $20.

How is Tip Pooling defined?
Tip Pooling is the process by which tips are divided to pay out restaurant staff. Restaurants typically develop a policy for these types of calculations and payouts for the front of house employees within the restaurant. Employers can enforce a tip-pooling policy for employees that receive tips on a regular basis, as long as the employer is paying them at least minimum wage.

How are Tip Pools calculated?
Tip Pools are most often calculated by compiling the total tips employees receive, or from the total sales, the servers or bartenders receive in a given shift.

  • Tip-based calculation: when tips are pooled and reallocated to include additional roles like hosts, bussers, and back waiters.
  • Sales-based calculation: roles that earn tips are expected to earn a certain number of tips in relation to their sales. They must tip in according to their sales, not their tips earned. If they get exemplary tips, they get to keep the extra. If they get smaller tips, they might end up owing money to the Tip Pool.

What are the common ways in which Tips are paid out?

  • Hours worked: allocates a tip shortfall by spreading it across tipped employees based on their percentage of hours worked.
  • Percentage: This is calculated as a percentage of employee hours worked.
  • Equally: In this case, tips are pooled equally.
  • Pooling Points: Employees are assigned points based on their role and given higher levels of points or lower levels of based on the total number of tips (I.e. a server has more points than a cook).

What is the benefit to employers and employees?

  • The benefit to employers: Tip sharing helps address the gap in pay between front-of-house (servers/bartenders/bussers/hosts) and back-of-house employees (chefs/dishwashers/cooks). Closing the pay gap could potentially lower the employee turnover rate in restaurants and additionally, employers can subsidize wages that would not typically receive tips.
  • The benefit to employees: this helps foster an environment of support since back-of-house workers are included. With tip policies in place, all employees receive at least some share of tips.

What are the requirements by law?
The FLSA requires that employers pay employees at least the federal minimum wage, which is $7.25 per hour. Employers are also allowed to use $5.12 per hour of tips against the total minimum wage, which is often called a Tip Credit. That means that restaurants can pay employees as low as $2.13 per hour. If the tip amounts don’t net out to the minimum wage on the state level, the restaurant needs to pay out the difference.

Employers must also not retain tips paid to employees, however, employees must report their tips received, which is often done using a point-of-sale system.

There are hefty penalties for violations of the law.

What are the recent changes to the law as of 2018?
Employers that do not use the tip credit are able to adopt Tip Pooling policies that include back-of-house employees.

Now, if the employer decides to have a Tip Sharing policy or a Tip Pooling policy – they can require that back of house employees be included. Essentially, the law eliminates the prior restrictions for employers, not using the tip credit, from requiring Tip Pooling with employees who are not regularly tipped. For those that are receiving Tips on a regular basis, this has caused some backlash (i.e. Server/Bartender vs. Cook/Dishwasher positions).

Who ultimately do tips belong to?
Tips ultimately belong to the employee, not the employer. Employees cannot be required to give tips to the manager or supervisors, but employers will typically pay employees less than minimum wage under the assumption that the employee will receive some tips on shifts, if eligible.

Why does this matter?
Employers continue to look for accurate, more frequent and direct ways of paying tips to employees. They also would like to reduce the need to have large sums of cash on hand.