Operations | 12 min read
Tip Pooling: Your Comprehensive Guide
By The Nowsta Team,
Millions of servers, bartenders, baristas, and others depend on tips to supplement their income. While direct client-to-server tipping is the most standard practice, many businesses opt to spread the love with a tip pooling policy.
When does it make sense for companies to implement tip pooling? For counter service businesses like coffee shops and some fast casual restaurants, shared responsibilities make it difficult for customers to direct their tips to a specific server. Many traditional table service restaurants also use tip pooling to encourage a more unified team mentality. In those cases, tips enter one general pot and are divvied up on a predetermined basis at the end of each month.
Federal law allows tips to be pooled for front-of-house and, in some cases, back-of-house staff as long as employees are properly notified of the policy. However, many states add their own laws regulating when tip pooling is allowed, who can participate, and how businesses have to communicate the policy to staff. Let’s dive in deeper to see what this means for businesses considering tip pooling.
How does tip pooling work under federal law?
In order to fully understand tip pooling, it’s helpful to define a few key terms:
Tipped employee: By federal standards, anyone who regularly receives more than $30 in tips a month is considered a tipped employee.
Tip Credit: The tip credit refers to employers’ option to pay tipped employees less than the minimum wage, as long as their tips make up the difference — if the tips aren’t enough, the employer has to pay the remainder. The minimum cash wage is the lowest possible wage employers can pay tipped employees under this arrangement. At the federal level, the minimum cash wage is $2.13 per hour. Employers who pay tipped employees that minimum cash wage therefore need tips to make up the remaining $5.12 to reach the federal minimum wage of $7.25 per hour. Individual states can, of course, mandate a higher minimum cash wage and overall minimum wage.
Front-of-house (FOH) employees: Employees that have direct interaction with the customer during the meal or service provided. These include hosts, wait staff, bartenders, baristas and bussers.
Back-of-house (BOH) employees: These employees support the front-of-house staff in the kitchen or office, including chefs, sous chefs and dishwashers.
Businesses that hire tipped employees can either mandate tip pooling or have staff vote on it depending on state laws — in some cases, employees can even set up a tip pooling arrangement amongst themselves without the employer’s input. We’ll get into the specific legal frameworks of different states later.
In 2018, federal law lifted the ban on tip pooling for back-of-house staff if, and only if, all employees make at least minimum wage. That means that if the employer takes a tip credit, only front-of-house employees can participate in a tip pool. But if the employer doesn’t take a tip credit, and all employees make minimum wage or higher, then both FOH and BOH staff can participate in tip pooling. In either case, managers and business owners cannot take from a tip pool under any circumstances.
Tips vs. service charges
A tip is a voluntary gratuity given directly from the customer to the business via cash, credit card or an item of value. A service charge is a predetermined percentage added to a bill for things like large catering contracts, large dining groups and hotel stays. While tips are regulated by tip pooling laws, service charges are not. Employees are obligated to treat service charges as traditional income and report it as such.
Tip pooling methods
When a business implements tip pooling, some percentage of tips, or even all tips, goes into a common pot. Managers divide the pot up at the end of each month based on employees’ hours, job role, or other factors — the important thing is that the criteria are clearly communicated to all employees. This system is ideal for businesses where employees work as a team to ensure the quality of the service experience.
Pooled tips are generally split up using one of the two systems below:
Hours-based tip pooling
If the employees in the tip pool all share roughly the same job responsibilities, then they may opt to simply divide up each month’s tip pool based on the number of hours each employee worked that month.
A busy coffee shop with two baristas receives cash tips in a tip jar. The manager then breaks up the pot of money at the end of the month based on everyone’s worked hours. At the end of the month, the tip jar has $2,000 in it, and the team of three baristas has worked a total of 360 hours.
- Barista A worked 180 hours (50% of all hours worked)
- Barista B worked 108 hours (30% of all hours worked)
- Barista C worked 72 hours (20% of all hours worked)
Based on that breakdown, Barista A would get $1,000 in tips for the month, Barista B would get $600, and Barista C would get $400.
Role-based tip pooling
Sometimes, many different types of employees will be involved in a tip pool. In these scenarios, employees in different roles will get different percentages of the tip pool, usually depending on how much they interact with customers. Customer-facing staff like servers and bartenders will get more, since the level of service they provide is seen as the biggest determinant of tip amount.
Waiters and bartenders at a restaurant receive tips directly from customers. Under the tip pooling agreement, they keep 60% of those tips, give 25% to hostesses, and 15% to bussers. So, if a waiter makes $200 in tips one night, they would keep $120, put $50 into a pool for hostesses, and put $30 into a pool for bussers. At the end of the month, hostesses and bussers would divide their respective tip pools amongst themselves.
State Requirements for Tip Pools
As is the case with many US Labor Laws under the Fair Labor Standards Act (FLSA), some state laws slightly vary or add to the federal requirements. Plenty of states choose to follow the federal laws without additional stipulations. To reiterate, a valid tip pool under federal standard means:
- Between wages and tips, employees must make the equivalent of their area’s minimum wage, or else employers must make up the difference.
- Employers must inform employees of tip sharing policy
- Owners, managers and employers cannot participate in the pool
- Back-of-house employees may participate when the owner does not take a tip credit
All U.S. states follow these federal standards on tip pooling, but some have enacted additional regulations. Specific outlines can be found on each state’s labor website, but we’ll go through the broad strokes below.
Chain of service requirement
In some states, employees can only participate in a tip pool if they directly provide service, or assist in serving customers within the main responsibilities of their job. This generally means tip pooling is limited to just front-of-house staff.
California also lays down ground rules for fairly distributing tips. Employers must arrange a system that allots larger percentages of tips to those with larger responsibility, such as a wait staff compared to hostesses.
States with a chain of service requirement include:
- New York
- North Carolina
Pooling laws with voluntary exceptions
Two states allow employee-mandated tip pools with voluntary exceptions. They are outlined below:
- Delaware: Employers cannot require the primary service worker — the person who directly waited on the customer — to contribute more than 15 percent of received tips in mandatory tip pools.
- North Dakota: Allows tip pooling if more than 50 percent of employees agree to it.
Utah’s Notice in Writing
Utah requires employers to alert new hires of their pool tipping practice in writing when they are offered the position. If a new tip pooling policy is to be implemented, managers must alert all employees in a formal written notice.
Cannot Require Tip Pooling
In the following states, employers cannot require their employees to participate in a tip pool. Only when employees agree to tip pooling voluntarily can the system be implemented. In these cases, employees can keep all their individual tips but can also choose to contribute amounts of their choice to a pool that they’ve arranged on their own. The employees may ask their manager to facilitate the voluntary tip pool but cannot require anyone to participate.
States in which employees cannot be required to pool tips include:
- New Hampshire
How to get started with tip pooling
Is a tip pool right for your business? Follow a few guidelines to get started:
- Review federal and state laws. Clarify your state’s tip pooling laws to ensure your employee’s fall within the proper category of service, whether or not you’re required to hold a vote and how to notify your team.
- Discuss with your team members. Federal law requires proper notification before implementing a pooling system. Use your discretion on whether a mandatory or voluntary tipping pool is right for you.
- Choose a distribution system. If you manage a catering waitstaff that completes the same role over the same amount of time — such as for a large event — it is often best to divide the tips up evenly. In other cases, managers often choose an approach that fairly distributes tips based on work. As we explained earlier, choose a percentage-based or hourly system that works for you and your employees.
- Tip or service charge? Catering companies often include a 15-25 percent service charge within their contracts. As we mentioned earlier, federal law treats this money as normal income, and not as a tip. Therefore, they are not regulated in the same way as tipping pools. If you do not choose to include a service charge on your contract, be sure to note this to the client so they know to include the tip in cash at the event.
Tip pooling can encourage teamwork and camaraderie in the right environment. However, every restaurant and company varies. Some employees prefer the personally driven tipping system. Waitstaff or bartenders with specific expert wine or culinary knowledge, for example, may not want to evenly split tips with a larger team. Include your team in the decision-making process wherever possible and be sure to stay up to date on tip pooling laws and trends as the industry adapts.