Restaurant Tip Pooling Rules: Federal and State Requirements

Federal Tip Pooling Rules Under the FLSA

The Fair Labor Standards Act (FLSA) governs tip pooling for employers nationwide. Under the Consolidated Appropriations Act of 2018, which amended FLSA Section 3(m), employers are prohibited from keeping employee tips regardless of whether they take a tip credit. Managers and supervisors may not participate in tip pools under any circumstances.

The Department of Labor's 2021 final rule clarified that employers who do not take a tip credit may include non-tipped, non-managerial employees such as cooks and dishwashers in mandatory tip pools. Employers who take a tip credit may only include traditionally tipped employees like servers and bartenders in the pool.

Tip Credit Considerations

Under federal law, employers may take a tip credit of up to $5.12 per hour toward the minimum wage obligation for tipped employees, provided several conditions are met. The employer must inform employees of the tip credit provisions, and the employee must retain all tips except those contributed to a valid tip pool.

Employers who take the tip credit must ensure that the employee's tips plus the cash wage paid equal at least the federal minimum wage of $7.25 per hour. If tips are insufficient, the employer must make up the difference.

State Law Variations

State laws on tip pooling vary considerably and may impose stricter requirements than federal law. California and several other states prohibit employers from taking any tip credit, meaning employees must receive the full state minimum wage before tips. In these states, broader tip pooling arrangements that include back-of-house employees are generally permissible.

Some states, including Montana and Oregon, prohibit tip pooling entirely or limit the percentage of tips that may be pooled. New York has specific rules about the types of employees who can participate in tip pools and requires that tip pooling arrangements be voluntary under certain conditions.

Common Compliance Pitfalls

Restaurant employers frequently encounter problems with tip pool administration. Common violations include allowing managers or owners to participate in pools, failing to distribute pooled tips promptly, and using tip pool funds for business expenses. Each of these practices violates federal law and can result in significant liability.

Another frequent issue involves service charges. Unlike tips, mandatory service charges are the property of the employer and need not be distributed to employees unless the employer has represented otherwise. However, misrepresenting service charges as tips is unlawful.

Best Practices for Compliance

Employers should document their tip pooling policy in writing and distribute it to all affected employees. The policy should clearly identify which positions participate, how tips are calculated and distributed, and the frequency of distributions. Regular audits of tip distribution records help identify and correct errors before they become costly.

Maintaining detailed records of all tips received, pooled, and distributed is essential for defending against wage claims and DOL investigations. Given the complexity of multi-state tip pooling compliance, restaurant groups operating across state lines should consult with employment counsel in each jurisdiction.