Don't Drown in the Tip-Pool: Tips & Tricks for Making Sure your Tip-Pool is Legal

Courtesy of Buzzfeed.

Courtesy of Buzzfeed.

For many restaurants, bars, and hospitality companies, tip-pooling is a common practice.  Contrary to what many believe, "tip-pooling" is a concept heavily regulated by the Fair Labor Standards Act ("FLSA") and the North Carolina Wage and Hour Act ("NCWHA").  Not surprising is the fact that the tip-pooling rules are convoluted, subject to varying court interpretations, and therefore difficult for even the brightest of minds. 

What is a "Tip-Pool" and How do I Get One?

For all my servers out there, the tip-pool is the part of your day where you become extremely annoyed that you have to "share" some of your tip money with the bussers you have argued with all night for not keeping your tables clean.  (For the bussers out there, the "tip-pool" is how you seek revenge).  The U.S. Department of Labor defines a "tip-pool" as an arrangement to share a certain percentage of one's tips among employees who customarily and regularly receive tips.  Its a socialistic method to even up the playing field among tipped employees by ensuring the Employer gets a tip credit for all those working below minimum wage.  (See last week's blog for more info on tip credits). It may also help employees work as a team.

Who is Eligible to Dive in the Tip-Pool?

Only employees who "customarily or regularly receive tips" are eligible to participate in a tip-pool.  The key here is "CUSTOMER INTERACTION."  If an employee does not regularly interact with customers, then they should be omitted from any tip-pool (THINK: back-of-house staff like chefs, dishwashers, cooks, janitors, etc).  If the employee regularly interacts with customers (THINK: front-of-house staff like servers, bartenders, hosts, bussers, etc), then he or she can participate in a tip-pool if they customarily and regularly receive tips.  

Can the Employer Swim in the Tip-Pool?

No, no, and no.  One of the trade-offs with the tip credit is that the employee has 100% ownership of his or her tips, absent a valid tip-pooling arrangement.  This means that employers using the tip credit to fulfill their minimum wage requirement cannot participate in a tip-pool.  One other thing,  "employer" has a broad definition in the FLSA and is defined as: "any person acting directly or indirectly in the interest of an employer."  Therefore, be careful when managers, floor supervisors, trainers, or employees with sufficient managerial/supervisory authority are in a tip- pool because this may be violating the FLSA. 

Voluntary vs. Mandatory Tip-Pools. 

If a tip-pool is voluntary, participation by the employee is optional.  Optional means without retaliation, coercion, control, or employer involvement.  In other words, if the tip pool is voluntary, it better be truly voluntary and perceived as such by your employees.  The U.S. Department of Labor is still unsure if an employer can take a tip credit in connection with a voluntary tip-pool (surprise, surprise).   You should also know that despite the hands-off nature of a voluntary tip- pool, the employer must continue to keep an accounting of the tips being distributed.  So the employer cannot be in the pool but they should at least function as a lifeguard. 

If a tip-pool is mandatory then it is required as a condition of employment.  READ:  It better be clearly stated in your Employee Handbook.  Only those who regularly or customarily receive tips can be in a mandatory tip-pool.  The employer is required to notify employees of the amount of tips they must submit to the tip pool and the employer can only take a tip credit for the tips each employee actually receives as part of the tip pool.  Finally, the employer cannot retain an employee's tips for any reason other than the required tip-pool. 

What about NC? 

North Carolina says tip-pooling is okay for those who regularly and customarily receive tips, so long as no employee is forced to relinquish more than 15% of his or her tips.  If you do the math, this means employees should be leaving the pool with at least 85% of their tips.

Free Advice! 

1. NOTICE NOTICE NOTICE:    Although there no absolute remedies against lawsuits, putting policies in writing is always a good start.   If you want to have a mandatory tip-pool, thats totally fine. But you need to put that policy in writing and circulate it among employees.  If you want to earn an A++, you'll have each employee sign an acknowledgment stating that they understand the tip pool is mandatory and have been told the percentage of tips required.  

Similarly, if you want to have a voluntary tip-pool, you should also verbalize the voluntariness of the tip-pool in a written policy and practice what you preach. No retaliation against employees who do not wish to participate.   

2. CONSISTENCY:  The percentage contribution should be the same for all participants.  Otherwise, you are setting yourself up for disaster in the form of a discrimination lawsuit. These typically never end well. 

3. EVALUATE THEN REEVALUATE THEN EVALUATE AGAIN:  Only those employees who customarily and regularly receive tips can participate in a mandatory tip-pool.  Remember: CUSTOMER INTERACTION is key to this analysis.  People who do not regularly interact and  engage with customers are probably ineligible to participate.  People who regularly interact and engage with customers are probably eligible, so long as they are not managerial so as to be considered the "Employer."  Because people's roles change over time and because in the service industry employee turnover is always high, it is important to reevaluate mandatory tip-pools every few months to make sure you are still in compliance.  You will also want to make sure employees in the tip pool are still maintaining 85% of their tips.  

If you need a written policy, want help notifying employees, or have found yourself confused, let me know. I like to talk and as long as you like to listen, you may learn a lot!