The practice of compensating service workers through customer gratuities is common in the hospitality industry, particularly in restaurants and bars. The management and distribution of these funds through structures like tip sharing and tip pooling represent a complex area of employment law. Because tips are considered the property of the employee, federal and state regulations strictly govern how employers facilitate their distribution and who can legally benefit. Understanding the difference between voluntary arrangements and mandatory, employer-controlled systems is paramount for both workers and business owners.
Defining Tip Sharing and Tip Pooling
The terms “tip sharing” and “tip pooling” refer to two distinct mechanisms for distributing gratuities. Tip sharing describes a voluntary arrangement where a directly tipped employee, such as a server, gives a portion of their tips directly to supporting staff. This “tipping out” process is common for distributing funds to employees like bussers, runners, or host staff at the end of a shift. The decision on the amount and who receives it generally rests with the employee who earned the initial tip.
In contrast, tip pooling refers to a mandatory, employer-controlled structure where all tips earned by a group of employees are collected into a single fund. The employer systematically redistributes this pool according to a predetermined formula. Tip pooling is heavily regulated by federal law because it involves the employer asserting control over the employees’ tips. This structure ensures equitable distribution among all staff who contribute to the customer experience.
The Legal Framework Governing Tip Sharing
The primary federal law governing wages and tips is the Fair Labor Standards Act (FLSA), which establishes the foundational rules for how tips must be handled. Under the FLSA, tips are the property of the employee, and employers, including managers and supervisors, are prohibited from keeping any portion of them for any purpose. This prohibition on “keeping” tips extends to not allowing managers or supervisors to participate in any employee tip pool.
The employer’s decision to use the “tip credit” heavily influences the structure of a legal tip pool. The tip credit allows an employer to pay a tipped employee a lower direct cash wage than the federal minimum wage, provided the employee’s tips make up the difference. If an employer takes this tip credit, the law restricts participation in the tip pool only to those employees who “customarily and regularly” receive tips, such as servers, bartenders, and bellhops.
If an employer chooses to pay all employees the full federal minimum wage or higher without taking a tip credit, the tip pooling rules become more flexible. In this non-tip-credit scenario, the FLSA permits the employer to include employees who do not customarily and regularly receive tips in the mandatory tip pool. The employer’s choice regarding the tip credit determines the legal eligibility of employees in the pool.
Who Can Legally Participate in a Tip Pool?
Owners and Managers
Federal law explicitly prohibits owners, managers, and supervisors from receiving any tips from a mandatory employee tip pool. This restriction applies even if the owner or manager spends a significant amount of time performing the same duties as the tipped employees, such as serving tables or tending bar. The rationale is that allowing management to participate would violate the statutory prohibition on employers keeping any portion of the employees’ tips.
Individuals who qualify as managers or supervisors under the FLSA’s executive duties test, or owners actively engaged in management, are strictly excluded from the pool. The only exception is that a manager or supervisor may keep tips received directly and solely from a customer for service they personally provided. They cannot receive a distribution from a pool that includes tips earned by other employees.
Non-Tipped Employees
The eligibility of back-of-house (BOH) staff, such as cooks, dishwashers, and chefs, to participate in a tip pool depends entirely on the employer’s decision regarding the tip credit. If the employer utilizes the tip credit, the pool must be limited to front-of-house (FOH) employees who are engaged in a tipped occupation. Since BOH staff do not customarily and regularly receive tips, they are legally excluded from tip pools where the employer claims the tip credit.
However, if the employer pays all employees a direct cash wage equal to or greater than the full federal minimum wage, they may implement a “nontraditional” tip pool that includes BOH staff. This structure allows tips to be shared more broadly across the entire team. This is permitted provided the employer is not relying on tips to meet minimum wage obligations for any employee.
The Dual Jobs Rule
The question of how to compensate tipped employees who perform duties that do not directly generate tips has historically been governed by the Dual Jobs Rule. For a period, federal guidance attempted to limit the amount of time a tipped employee could spend on “tip-supporting” work—like rolling silverware or stocking the bar—to no more than 20 percent of their workweek. This former guidance, known as the 80/20 rule, was designed to ensure employees spent the majority of their time on tip-producing work when the employer claimed a tip credit.
Recent federal court decisions and regulatory action have vacated and withdrawn the specific 80/20 limitation. Current guidance reverts to the original Dual Jobs Rule, focusing on whether the non-tipped work is related to the tipped occupation. If the side work is related to the tipped job, the employer may claim the tip credit for that time, regardless of the percentage of the workweek it consumes. The employer must pay the full minimum wage for time spent on tasks entirely unrelated to the tipped occupation, such as general maintenance or janitorial duties.
Common Models and Distribution Methods
Once tips are pooled, a transparent and consistent method is necessary to distribute the funds fairly among eligible participants. One common model distributes the pool based on a fixed percentage of sales generated by each employee, where the pool is then divided among supporting staff proportionally.
Another method calculates distribution based on hours worked, where each participant receives a share proportional to the hours worked during the pooling period. Some establishments utilize a points system, assigning a different weight or point value to each position based on job duties. Regardless of the method chosen, the formula must be clearly communicated to employees and applied consistently.
State and Local Regulations
While the FLSA provides the federal floor for tip pooling regulations, state and local laws frequently impose more stringent requirements on employers. Many states have established a higher minimum wage or a higher direct cash wage for tipped employees, which supersedes the federal standard. Several jurisdictions have also enacted laws that prohibit the tip credit entirely, meaning all employees must be paid the full state minimum wage.
These localized regulations can significantly alter the legal framework for tip pools, often having different rules regarding who can be included, particularly concerning BOH staff. For example, some states may prohibit the deduction of credit card processing fees from tips, even though federal law permits it. Businesses must check the specific labor laws and regulations of their state and municipality to ensure complete compliance.
Employer Obligations and Best Practices
Employers who operate a tip pool have several administrative and record-keeping responsibilities to ensure legal compliance and transparency. Accurate record-keeping is paramount, requiring the employer to track the total amount of tips collected and the precise amount distributed to each participating employee. These records must be maintained to demonstrate that all tips are fully redistributed and that no portion is retained by the employer or management.
The law requires that pooled tips be distributed to employees no later than the regular payday for the workweek in which they were collected. Prompt distribution ensures the tips are treated as current income. When tips are paid via credit card, federal law permits the employer to deduct the proportional transaction fee charged by the credit card company. However, this deduction is only allowed if it does not reduce the employee’s total earnings below the applicable minimum wage, and many state laws prohibit this practice. Clear communication of the tip pooling policy, including the distribution method and any allowable deductions, is a best practice for ensuring fairness.