Tip Pool Rules (under the federal Fair Labor Standards Act)

A “tip pool” is a way that restaurants and other businesses can divide tips among employees. For example, all waiters and waitresses might put their tips into a common pool and split them at the end of the night. Although courts have held that the Fair Labor Standards Act (FLSA) allows employers to require participation in a tip pool, certain rules must be followed. Here, you will find what the rules are and what happens if an employer breaks the rules.

What are the tip pool rules?

The FLSA requires employers to pay employees at least minimum wage for each hour worked. Employers are allowed, however, to pay “tipped employees” less than minimum wage if certain requirements are met. Paying tipped employees less than minimum wage is often referred to as taking the “tip credit.”

In order for an employer to pay a tipped employee less than minimum wage, the employee must be allowed to keep all of his or her tips. The employer must also inform the employee about the tip credit provision. When it comes to tip pools, employers often get tripped up by the requirement that tipped employees must keep all of their tips. Although tips can be split with other “tipped employees,” the tip pool may not include non-tipped employees. If a non-tipped employee shares in the tip pool, the pool is improper and illegal.

What are some examples of improper tip pools?

  1. A bar owner who shares in the tip pool during the time that he bartends. This is not proper because an employer may not share in the tip pool. This is true even if the owner is performing functions like waiting tables or serving drinks.
  2. The restaurant keeps 10% of the tip pool as an administrative, handling, or other fee. Some employers justify keeping a portion of the tip pool as covering costs like credit card transaction fees. While employers are permitted to deduct an amount from the tip pool to cover credit card transaction fees, these fees are generally not above 3%. Employers are not allowed to keep amounts over and above the actual transaction fees. This is essentially just like an owner directly keeping a portion of the tips for herself and is likewise illegal.
  3. A manager who shares in the tip pool. Generally, a manager is not a “tipped employee” so may not share in a tip pool. Further, sometimes managers count as “employers” under the FLSA’s broad definition. As above, “employers” may not share in a tip pool. Often times, however, the “manager” performs a mix of management and general functions. Therefore, determining whether a manager can share in a tip pool is generally a fact-specific question. Things to look for: Can the manager hire or fire? Can the manager discipline employees? What other authority over the employees does the manager have? How is the manager paid?
  4. Non-tipped employees sharing in the tip pool. Only tipped employees may share in a tip pool. Therefore, members of the kitchen or office staff may not share in the tip pool.

What happens if the tip pool is improper or illegal?

If an employer messes up a tip pool, the consequences for the employer can be serious. The employer is not permitted to pay less than minimum wage (take the tip credit) for as long as the tip pool was improper. The employer will owe each employee the difference between actual minimum wage and the tipped minimum wage they paid the employee.

For example, let’s say the minimum wage is $7.40. You work for an employer as a server and are paid $3.70 per hour. You’ve worked full time for the last four weeks. During this time, the employer kept 10% of the tip pool (thus invalidating it). Therefore, your employer should have paid you $7.40. Because they only paid you a tipped minimum wage of $3.70, you are owed the difference between full minimum wage and tipped minimum wage for all of the hours that you worked. This would be $592 (40 hours x 4 weeks x $3.70).

When an employee is not paid what they earned, the losses usually extend beyond just the difference of what they were paid and what they were owed. Bills go unpaid, opportunities are missed, etc.. Therefore, the FLSA offers additional compensation to employees in the form of “liquidated damages.” “Liquidated damages” is an additional amount awarded by the court to help compensate employees for the losses of not receiving a fair wage. Under the FLSA, employees are presumed to be entitled to two times their unpaid wages. In the example above, you would be entitled to $1,184 ($592 x 2). Employees are also entitled to the attorney’s fees incurred in pursuing their claims. Ohio law allows employees to recover three times their unpaid minimum wages.

What if I made more than minimum wage in tips?

If your employer does not follow the tip pool rules, then it does not matter how much you made in tips. You were still entitled to be paid full minimum wage.

I think I am/was required to participate in an improper or illegal tip pool. What should I do?

The first thing you should do if you believe your employer is shorting your wages is to begin keeping track of your hours yourself. Start a daily journal and track your work times. Remember that work time is generally from the moment you enter your place of business until you leave, not necessarily when you clock in and out. The Department of Labor has an app to help you do that. You can find it here. You should also be sure to keep all of your pay stubs or other records of what you were paid and how much you were paid.

The next thing you should do is contact a wage and hour attorney. A lawyer can help determine whether your employer is, in fact, breaking the law. If your employer is breaking the law, the attorney can help rectify the situation. Sometimes this means just letting your employer know they are acting illegally (and requesting compensation for you). Other times it means filing a lawsuit. Those are decisions that your lawyer can help with.

I need help with a tip pool issue.

If you need help with a tip pool or other wage and hour issue, you should contact an experienced wage and hour lawyer. The wage and hour law team at Markovits, Stock & DeMarco is equipped to assist both employees and employers with tip pool issues.

Click here to Learn more about the law firm of Markovits, Stock & DeMarco or call (614) 604-8759 to speak to a lawyer.