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Tip Pooling….Is Your Restaurant Doing this Lawfully?

June 27, 2018

Do your restaurant employees pool tips? Make sure you have a lawful tip pooling arrangement in place—if not, you might be subject to hefty fines.

Does your restaurant have a tip pooling arrangement among workers? If so, make sure that you are complying with tip pooling laws—there are penalties for those who do not comply.

How does tip pooling typically work?

Tip pooling is a sharing arrangement among employees who customarily receive tips (waiters, waitresses, bellhops, bussers and bartenders). In a common tip pool situation, waiters and waitresses (who typically handle all transactions with customers) give up a percentage of their tips at the end of the shift to any “back of the house” employees like bussers, bartenders, etc.

While tip pooling is commonplace in sit down restaurants, it’s also common in pizzerias, cafés, coffee shops, ice cream shops etc. (where funds from tip jars are pooled and divvied up between the entire staff).

Recent legislation—Who can get a share of the tips?

There has been much discussion this past year about tip pooling arrangements, specifically focused on exactly who is allowed to a share of the tips. Just waiters, waitresses, bussers, bartenders? Or cooks and dishwashers, too? What about managers and supervisors?

Prior regulations, issued in 2011, barred tip pooling at establishments that included employees who did not customarily receive tips, such as dishwashers and cooks, if the employer did not claim a tip credit under FLSA section 3(m).

Wait, what’s the “tip credit”? – For purposes of this article, tip credit is not the FICA Tip Credit we've discussed in previous blogs. Instead, it relates to Section 3(m) of the FLSA, which permits an employer to take a tip credit toward its minimum wage obligation for tipped employees equal to the difference between the required cash wage (which must be at least $2.13) and the federal minimum wage. Thus, the maximum tip credit that an employer can currently claim under the FLSA section 3(m) is $5.12 per hour (the minimum wage of $7.25 minus the minimum required cash wage of $2.13). Under certain circumstances, an employer may be able to claim an additional overtime tip credit against its overtime obligations. Keep in mind these rates are Federal rates. Most States have higher minimum tipped and standard wages rates, which employers must follow.

In other words, the tip credit allows employers to pay a lower minimum wage rate, provided the employee's earned tips are sufficient enough to get the employee up to the standard minimum wage rate.

The Consolidated Appropriations Act

This was signed into law March 23rd 2018, and amends the Fair Labor Standards Act (FLSA) to prohibit employers from keeping tips received by their employees, regardless of whether the employer takes a tip credit. The Act also eliminated wording that barred tip pooling when employers pay tipped employees at least the full FLSA minimum wage and do not claim the tip credit.

The DOL further clarified this amendment to the FLSA in the Field Assistance Bulletin issued on April 6th, 2018.

In it, the DOL states that:

  • Employers that pay the full FLSA minimum wage can now include employees who are not customarily or regularly tipped in tip pooling arrangements, such as back-of-the-house employees like cooks and dishwashers. However, the Act specifically prohibits managers and supervisors from participating, since the Act equates such participation as "the employer" keeping the tips.
  • The Wage and Hour Division of the DOL will impose civil monetary penalties of up to $1,100 per violation of tip pooling regulations (i.e. employers unlawfully keeping tips)

**Note that the FLSA does not prohibit states or cities from imposing their own standards regarding tip pools and tip credits**

Next steps

Have employees that receive tips? We can help you navigate tip pooling regulations. It’s also a good idea to visit the DOL Wage and Hour Division (WHD) for more information and applicable guidance. You’ll want to discuss the tip pooling arrangement with your legal counsel and human resources department, as well.

We can help you navigate the rules—Contact our Hospitality Services team today.

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