Tip pooling in restaurants: The how, the why, and the law
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Let’s be clear right out of the gate: Tip pooling is a polarizing topic. The concept is relatively simple at first glance, but gets complicated quickly. The most basic explanation is that employees’ tips are collected and distributed evenly among staff. In some circumstances, this includes tipped employees like bartenders and untipped employees like dishwashers, bussers, or back-of-house (BOH) staff. In other cases, only tipped employees share the pool. There are many variations of restaurant tip policies for employees.
Some argue that it allows for a more fair distribution of income and helps boost salaries above minimum wage, especially for untipped employees. Others say tip sharing is immoral, impractical, and disincentivizes employees who go above and beyond for their tips.
We’re not taking any particular side here, as the decision to share the tip jar is a complex one that business owners need to make for themselves. Tip pooling is also governed by both federal and state laws, including some from the Department of Labor (DOL), so nothing in here is intended to be legal advice.
Let’s take a closer look at what a restaurant tip policy for employees can look like, arguments for and against it, and some relevant laws.
Tip-pooling policies: 3 potential scenarios
So, we’ve noted that tip pooling can come in many flavors. There are a lot of variables to consider and many different options for arranging the setup. Let’s look at three different configurations to get an idea of what a restaurant tip policy for employees can look like.
Scenario 1: Equal division
In the first scenario, all tips are collected and divided equally among all front-of-house (FOH) staff members. This approach can be valuable for smaller establishments, where all team members contribute, there’s a degree of personal camaraderie, and employees are happy to make tipping out a collective experience. This scenario can also encourage all employees to pull their weight and create social pressure to do a good job.
Scenario 2: Differentiated division
In a second scenario, tips are divided among employees based on the number of hours they have worked, tables or customers they have served, or other similar factors. This can work for larger establishments where employees have more specific roles or specialize on certain tasks.
Scenario 3: Partial contribution
In the third scenario, employees can contribute a portion of their tips to a collective pool that is then distributed among the staff. This can be set up as a percentage of tips or left up to employees to decide amongst themselves how much to contribute.
Other tip-pooling considerations
There are, of course, some important considerations to make when deciding on any tip-pooling program. Will the system be only for FOH staff, or will BOH staff be included as well as part of a broader tip-sharing program? Will there be bonuses used from the pool for exceptional work? What level of input will staff members have in determining just how the system works? How will credit card and cash tips be pooled together to make for a fair and transparent distribution of tips?
Whatever route a business takes, it’s crucial to ensure staff members find the system fair. If someone feels like they’re getting too large a cut of their income redistributed, they’ll end up unhappy, and it’ll show in their work. Keeping employees happy is critical to keeping customers happy since your employees are your public face.
If you’re considering starting a tip pool, make sure to talk to employees about it first to see how they feel about it. If it seems like it’ll ruffle a lot of feathers and lead to problems between staff, it may not be worth it. However, if employees support the idea, then you’re good to go. A bit of democracy in the creation process will help employees feel heard and remain satisfied.
Tip pooling vs. tip sharing
Do note that there is a difference between tip pooling and tip sharing. Tip pooling typically means a pool exclusively for FOH staff. Tip sharing, on the other hand, can include BOH staff. This is often a popular idea with kitchen staff like chefs, who sometimes feel like they’re getting left out of a potentially lucrative night after hard, fast-paced, sweaty work.
Whichever scenario you choose, and before any policy change, talk to all your employees about it and make sure they’re on board. That’s not just ordinary advice—it’s actually a federal law that tip-pooling policies have to be clearly explained to all employees involved.
Tip-pooling laws: It gets messy
We mentioned tip-pooling laws just above, so here we are. It’s never super fun discussing the nitty gritty of legal stuff when discussing restaurants—we’d be way happier to discuss new drinks, recipes, or entertainment ideas. However, you can’t get away with talking about tip pooling without discussing the laws, so bear with us.
Before we get too deep into the weeds, we’ll note we highly recommend consulting a lawyer before implementing any changes since tip-pooling laws vary by state and are changing rapidly at the federal level as well. For example, tip pooling can legally be extended to BOH staff as of 2018.
Employees only
One of the most important tip-pooling laws is that restaurant owners aren’t allowed to touch any cash in the tip pool. That should seem fairly obvious, but it’s best to be clear about that. That same law extends to restaurant managers as well.
Tip credit
Many states have different minimum wages for tipped workers under the assumption that their tips will put them at or above the full minimum wage. This practice is known as a tip credit. From an employer’s point of view, it can keep down labor costs, but if the practice is abused, it can lead to wages below the federal minimum wage. Clearly, that’s a no-no. As of 2018, restaurant owners can implement a tip-pooling program whether or not they claim a tip credit. This federal provision is laid out under the Fair Labor Standards Act (FLSA).
Tips vs. service charge
Remembering the differences between tips and service charges is crucial when it comes to tip-pooling arrangements. Tips are gratuities voluntarily given by customers, while service charges are surcharges added to a bill that customers must pay. Tips are legally the property of employees, while service charges are the business’s property. Employers are allowed to distribute service charges as they see fit.
Local laws: Pay attention
California is known for strict labor laws, and it’s certainly true in the F&B industry. For example, sharing tips with BOH staff in California is not legal. Furthermore, tip credits are not allowed in California and employers are required to pay their staff the full minimum wage for hourly wages no matter what they earn in tips. Of course, California also has a higher state minimum wage than many other states.
If we were to cover every local law regulating tip pooling and wages, we’d put you to sleep. So, again, we highly recommend contacting a lawyer to ensure you’re doing everything above board in your home state.
Make life easier in your FOH
So, as you’ve probably seen, tip pooling has a lot of complexity. It’s a radioactive topic in many circles, and everybody in the hospitality industry has an opinion. We encourage restaurant owners to get knowledgeable on the local laws in their area, discuss any policy with staff, and keep up with any changes from the DOL.
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Want to see what it’s like to have silky-smooth online reservations, check-ins, and waitlists? Curious how Guest Manager can help improve table management? Reach out to us for a free demo, and we’ll show you the ropes. Nothing is better than finding simplicity in a complex world.