Navigating fair compensation for restaurant employees can be an intricate undertaking. And few aspects are as potentially challenging as considering whether to pool tips. As a new establishment or a seasoned brand, crafting a fair and transparent tip pooling policy can enhance employee morale and streamline operations. But crafting that policy requires a balance of equity, legal compliance and accountability.
Under a valid tip pooling arrangement employees can be required to share their tips with applicable employees but under no circumstance can an employer, including managers and supervisors, be included in the tip split.
Employers can require employees to “pool” tips, if it meets the requirements of the Fair Labor Standards Act (FLSA) and state law. Some state laws will trump the federal law when it comes to minimum wage requirements.
Below are “best practices” for setting up a tip pooling policy.
Create a tip pooling policy
A tip pooling policy should be in writing and employers should have every employee acknowledge the policy. A best practice would be to include the tip pooling policy in the employee handbook. Tips that are included are cash tips left on the table or in a tip jar, as well as credit card tips. The policy should include:
- Purpose of the policy
- Who is eligible, by position, and who is NOT eligible for tips
- Note that the tip pooling policy follows the federal and state guidelines, and all tips, cash and credit card, are 100% taxable and will be run through payroll to reflect both employee and employer taxes.
- Have each employee sign and date the policy for acknowledgment as all employees must be notified by the employer that they are participating in a tip pool.
Choosing a tip pooling arrangement
Traditional
- Traditional tip pooling arrangements are limited to occupations in which the employee regularly receives tips, including waiters, bellhops, bartenders and any counter personnel that serve customers. All employees who typically receive tips. Employers may not compel tipped employees to pool tips with those who perform non-tipped work such as cooks, dishwashers and janitors under the traditional tip pooling arrangement.
- The employer must pay the employee a minimum federally mandated wage of $2.13 per hour and their portion of the pooled tips through payroll. Federal guideline is to make sure the employee gross totals a minimum $7.25 an hour with wage and tips combined. This amount should never be lower than the $7.25 an hour, but some states do have a higher mandated minimum wage for tipped employees and as such that would trump the federal minimum wage in those circumstances. For example: Minnesota requires that tipped employees minimum wage is $8.15 per hour if the company gross sales is under $500,000 a year and if they exceed $500,000 a year the minimum wage is $10.00 an hour.
Non-traditional
- Non-traditional tip pooling is when an employer pays its employees a wage of at least the federal minimum wage and the employer imposes a tip pooling arrangement that includes employees who do not customarily receive tips, such as dishwashers and cooks. Managers and supervisors are prohibited from receiving tips.
Regardless of which tip pooling arrangement is being used all tips must be fully distributed based on whether they are being paid out daily or with each payroll.
Determine a method for distribution
Tip pooling funds must be distributed no later than the regular payday for the workweek.
Methods on how tip distribution per employee can be determined are:
- Shifts – Employers may divide the workday into specific shifts and split the tips collected within that shift. Example: Employer has three shifts, morning, lunch and evening. Two employees work the morning shift so all tips collected during that shift would be split between the two employees.
- Hourly – Employers may pool and divide tips based on the hours each employee works. Example: One employee works an eight-hour shift, and one employee works a three-hour shift. The total of the tips would be divided up by the number of hours worked and then multiply that number by the hours each employee worked to divide the tips accordingly.
- Role-based – Employer may divide pooled tips based on a specific role. Example: Server may receive a larger percentage of the tip pool than a host or hostess.
- Point-based – Employers may assign a certain number of points based on the level of responsibility that the employee has, calculate the amount of tip money for each employee based on their points. (This is not a very common method used.)
Can a credit card transaction fee be deducted from the tip pool?
The employer cannot retain any of the tips for any purpose. The exception to that rule is a tip given on a credit card. The employer can retain the transaction fee associated with the tip amount, regardless, if the employer is taking a tip credit. Example: A $10 tip is added on a credit card that charges a transaction fee of 3%. The employer can retain $.30 from the tip pool for that transaction. There may be different rules at the state level so if you decide to withhold a credit card transaction fee from tips you will need to reach out to your CPA and/or attorney to determine specific state requirements.
Recordkeeping
The employer needs to keep a record of the following:
- List of employees whose wages would include tips
- A record of each employee’s tips received
- The increased wage amount each tipped employee received
- Hours worked each working day in any occupation in which the employee does not receive tips, and total daily or weekly straight-time payment made by the employer for such hours (total hours worked, gross wages for job that isn’t tip based)
- Hours worked each working day in any occupation in which the employee does receive tips (total hours worked, gross wages for job that is tip based)
Whether the employer takes the tip credit or not and operates a mandatory tip pool, the employer must keep records of each employee who receives tips and the weekly or monthly amount of tips received by each employee.
What is a tip credit?
The FLSA allows an employer to take a tip credit toward the minimum wage and overtime wages. The employer must ensure all tipped employees receive enough tips and wages to meet the minimum wage and overtime requirements under the FLSA guidelines. What this means is that if the employee doesn’t have enough tips plus their wage to meet the minimum wage requirement the employer will make up the difference. Doing so will qualify the employer for the tip credit. To do so the employer must inform their employees either orally or in writing of the following information:
- The amount of the direct (or cash) wage the employer is paying a tipped employee, which must be at least $2.13 per hour
- The additional amount claimed by the employer as a tip credit, which cannot exceed $5.12 (the difference between the minimum required direct (or cash) wage of $2.13 and the current minimum wage of $7.25
- That the tip credit claimed by the employer cannot exceed the amount of tips received by the tipped employee
- That all tips received by the tipped employee are to be retained by the employee except for a valid tip pooling arrangement limited to employees who customarily and regularly receive tips; and
- That the tip credit will not apply to any tipped employee unless the employee has been informed of these tip credit provisions.
Employers following these guidelines when using the tip credit will receive a tax credit on their employer portion of FICA on tipped income on their business tax return.
Pros and cons of tip pooling
Pros
- There may be improved teamwork to give a good customer experience
- There will be fewer disputes over table assignments
- There may be an increased sense of responsibility for all positions
- Equal attention would be given to side work
Cons
- High performers take home less than they would normally in tips
- Resentment could develop with tip pooling
- There is a possibility of unfair distribution
- Lower performers are not as obvious
- Some employees may pocket a portion of their tips
There are a number of pros to tip pooling, but making sure you are compliant with the tip pooling guidelines can be a complicated matter. For more information on tip pooling, or to learn how Baker Tilly specialists can help, contact our team.
The information provided here is of a general nature and is not intended to address the specific circumstances of any individual or entity. In specific circumstances, the services of a professional should be sought. Tax information, if any, contained in this communication was not intended or written to be used by any person for the purpose of avoiding penalties, nor should such information be construed as an opinion upon which any person may rely. The intended recipients of this communication and any attachments are not subject to any limitation on the disclosure of the tax treatment or tax structure of any transaction or matter that is the subject of this communication and any attachments.
