Tip Pooling Rules in Every State: What Restaurant Owners Must Know

Tip pooling laws vary by state, affecting how restaurants manage tips and comply with federal and local wage rules. Restaurant owners are required to follow guidelines to avoid fines, lawsuits, and disputes over tip distribution and service charges.

By Douglas Wade, Attorney

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Have a quick question? We answered nearly 2000 FAQs.

Table of Contents

1. Introduction

2. Laws of Tip Pooling

3. Federal Laws Governing Tip Pooling

4. What about the required service charges?

5. How about processing costs for credit cards?

6. State-specific Tip Pooling Laws

7. Keep your dining establishment safe from these expensive errors

8. Repercussions for breaking tip pooling regulations

9. FAQs

Introduction

Tipping. The restaurant sector is always talking about it. However, it is undeniable that the majority of restaurant employees’ take-home money comes from tips. Restaurant owners have attempted to establish a more egalitarian system in a number of ways in order to increase staff retention and provide consistent, fair salaries. Tip pooling is one of those methods in which all tips are gathered into a single “pool” and then given back to the staff. It gets rid of some of the drawbacks of tipping, such as uneven pay, a focus on “excellent tables,” and a personal attitude among waiters.

As simple as this method of tip-out appears on paper, it is not only bound by federal laws but also by other state-by-state laws. Employers have to be accurate to prevent the possibility of angering workers through wrong tips or being at loggerheads with the Department of Labor. Nevertheless, under the circumstances of its proper realization, tip pooling will ensure equal wages to everyone.

This post will describe how tip pooling operates in various states and what operators and owners of restaurants may do to comply with the regulations.

Laws of Tip Pooling

Laws pertaining to tip pooling are open to change, frequently in response to requirements set forth by the federal government. The Department of Labor’s 2018 decision that back-of-house workers like chefs and dishwashers are qualified to be part of the tip pool was one of the biggest developments.

Federal Laws Governing Tip Pooling

If an employee receives more than $30 in tips in a month, they are considered tipped employees under federal law. If a worker’s tips total at least the $7.25 (federal minimum wage), the employer may pay them a salary below the minimum wage. If a worker’s hourly salary and tips total less than the minimum wage, the employer must apply a tip credit to make up the difference.

The United States Department of Labor released a final rule amending laws pertaining to tipped workers in 2021. The DOL specifically applied modifications to the 2018 amendments to section 3(m) and other Fair Labor Standards Act provisions:

First, even in the tip pool, managers, supervisors, and bosses are never allowed to keep worker tips.
Non-tipped workers, such as cooks & dishwashers, are eligible to join the tip pool if their employers pay tipped workers their full minimum wage (without deducting tip credit).
In general, employers who gather tips in order to support a required tip pool are required to redistribute all of the tips during the time frame in which they’re received.
In order to maintain an obligatory tip pool, employers who refuse to provide tip credit must keep payroll records or other documents that include details about every worker who receives tips, as well as the weekly and monthly total that the employee reports to the employer.

Additionally, the 80/20 rule, which stipulates that employers may only use tip credits if eighty percent or greater of an employee’s job is “tip-generating,” was brought back into effect. This includes bartenders who prepare and serve drinks, servers who serve food and set tables, bussers who clean tables, and so on. Support work, such as cleaning the bar and preparing tables, accounts for no more than 20% of the workforce. Above all, employers need to be aware of the regulations that apply to their business and let their employees know about them. In order to know if they are getting tipped out appropriately or not, employees ought to be proactive and informed about the guidelines.

What about the required service charges?

For big groups of diners, exclusive gatherings, or events, many restaurants add on a service charge to the bill.

This is not regarded as gratuitous under federal law and the majority of state legislation. The employer owns it.

However, certain states have different laws. See down for more details.

How about processing costs for credit cards?

Federal law permits companies to pass on the cost of processing to workers when tips are included in transactions made using a credit card, lowering tips by two to three percent. Some states forbid businesses from doing this and have distinct laws protecting employees.

State-specific Tip Pooling Laws

Each state is free to enact its own regional tip pooling rules in addition to the federal ones that are already in effect. States may have different minimum wage laws regarding whether tips are considered part of the minimum wage, whether tip pools are permitted, and whether processing costs for credit cards are subtracted from tips.

1. California

Tipping is permitted in California, and any pool funds must be dispersed equitably. The highest percentage of the tip pool should go to the servers, according to the Department of Labor Standards Enforcement. It is not possible to include managers who have the power to terminate workers.

If compulsory service charges are handed out, they are regarded as wages and are subject to the same taxes as tips. In California, the employer is responsible for paying the credit card handling fees.

2. Colorado

According to Colorado tip rules, businesses that plan to keep any tips for themselves must prominently display a warning about mandatory service fees. Additionally, a tip credit cannot be claimed by an employer who subtracts credit card processing fees.

3. Delaware

Both mandatory & voluntary are permitted in Delaware. Only employees who deal directly with customers are permitted to participate in an obligatory pool. No over fifteen percent of the tips paid by the main service-giving employee may be required to be contributed. No part of the pool may be taken by the employer.

Additionally, Delaware permits companies to establish an individual tip pooling scheme, with employees establishing the guidelines.

4. D.C., or the District of Columbia

Tipping is permitted in the Capitol under DC law, but only for staff members who collect tips on a regular basis.

Employers are allowed to pass on credit card processing fees to staff members, but they must give written notification outlining the proportion.

5. Hawaii

When compulsory service charges are utilized to sell food or drinks in Hawaii, employers are required to either give the money to staff members as tip revenue or inform customers that the fee for services will be utilized for expenditures and expenses other than employee wages and tips.

6. Kentucky

Compulsory tip pooling is not permitted in Kentucky. Only when employees willingly consent to tip pooling is it permitted.

7. Maine

Mandatory service fees in Maine are eligible to be incorporated into the pool since they must be regarded as tips. Regarding credit card processing fees, it may be argued that Maine forbids employers from requiring workers to pay them.

8. Massachusetts

Only workers who actively provide service are eligible to be a part of the tip pool, per Massachusetts law.

In Massachusetts, required service fees are handled similarly to tipping. They can be added to the tip pool and go to the staff members who served the customer. Another interpretation of Massachusetts state law is that it prohibits businesses from deducting credit card processing costs from employee tips.

9. Minnesota

Similar to Kentucky, tip pooling is not required in Minnesota. Furthermore, if workers choose to share the tips, the company may be chosen to oversee the tips and distribute them in accordance with the workers’ consent.

Unless it is explicitly communicated to the consumer that the service fees will not go to the worker, the employer is not permitted to keep any portion of the service charge.

10. Montana

Employees who prepare food or serve customers in Montana are permitted to share their tips.

Regarding service fees, they are considered a tip in Montana and must be given to the employee.

11. New Hampshire

Tipping or tip sharing is only permitted in New Hampshire if workers consent to it willingly and free from employer pressure. Employee issues pertaining to the pool may be handled by the employer, who may also recommend appropriate and usual practices. Employers might not, however, mandate tip pooling.

12. New York

Employers are only permitted to include workers who are directly involved in customer service and interactions in a legitimate tip pool in New York. The tip pool is not open to employers. However, a worker with little supervisory responsibility can participate (a worker with a lot of power cannot). Tips that other staff members neglect to add to the pool are not the employer’s responsibility.

The employee who rendered the service must be compensated for the service.

13. North Dakota

Only when tipped staff members in an establishment vote for it is tip pooling permitted. Fifty percent + one must support tip pooling. Every vote & name must be documented by the employer.

14. North Carolina

Although tip pooling is required by law in North Carolina, only workers who get tips on a regular basis are eligible to join. No portion of the pool may be retained by the employer. Additionally, staff members receive a minimum of eighty-five percent of the tips they receive before making contributions to the pool.

15. Utah

Employers are required by Utah law to document their tip pooling policy and give it to new hires or prior to the pool’s implementation.

16. Vermont

The Vermont Department of Labor recommends that companies notify workers if they engage in this activity in a written letter or employee handbook, even though it is not required by law.

17. Wyoming

Tip pooling is not required in Wyoming. Employers are not allowed to mandate that workers pool or split their tips. A tip pooling agreement may be freely accepted by staff members, but it is invalid if the employer forces or demands participation.

Keep your dining establishment safe from these expensive errors

Even if you want to make sure tip pooling is equitable and compliant with both state and federal regulations as a restaurant operator or owner, faults can still happen. Particularly when contrasted with other tipping schemes, tip pooling might be challenging.

1. Managers should not be included in the tip pool

According to Joshua H. Sheskin, “the most frequent error I observe is non-tipped personnel taking part in the tip pool, such as supervisors; a boss cannot keep any cash from a tip pool.” Sheskin works as an attorney with a focus on employment law.

2. Maintain Thorough Records

Other frequent errors include employers failing to keep track of the tips they pay or failing to account for cash tips. You must keep a record of all tips, even if they are paid in cash. Documenting your policy is one method to prevent misunderstandings. It’s even required in some states.

“You have to first let your staff members know that they are part of a tip pool and that you are going to compensate them if the tip pool doesn’t equal the minimum wage. This is most effective on a paper that is created by your lawyer and signed by the employee,” Sheskin advises.

Repercussions for breaking tip pooling regulations

Due to the importance of adherence to the tip pool provisions, restaurant managers and owners need to get an understanding that they might be fined in the event that they violate the tip pool provisions. The Fair Labor Standards Act (FLSA) tip pooling regulations should be held in mind, although you should remember the regulations of your state. Although there are states where it is prohibited, there are also those that regulate this tip-out system rigidly compared to the federal regulation.

According to federal law, violators will be fined and have to reimburse employees for their unpaid wages. States have different penalties for tip pooling, so depending on where you live, you can be subject to an extra fine or penalty.

The Department of Labor can investigate tip pooling errors. The true danger, though, is that your employees may sue you under the Fair Labor Standards Act, and you will not be able to defend yourself if you handled the tip pool improperly. The expense of handling each lawsuit might be high, even up to the settlement. The said claims are possible in state courts, though they tend to be filed in the federal courts, where one must pay to even appear.

The safest way to avoid fines is to learn federal laws and fines (and notice any changes in them), to get to know the state laws you need to deal with, and to keep records with the help of tip pooling services.

FAQs

1. What advantages does tip pooling offer?

The practice of tip sharing has several advantages. Firstly, it allows the servers to share their tip with other employees, like bussers & bartenders, who may have worked for the entire meal experience. The result could be a cheerier workplace and increased morale among staff. Secondly, tip pooling can guarantee that tips are given to staff members more fairly. Because some customers tend to tip larger amounts than others, companies might help balance out staff earnings by pooling tips.

2. Does the employer get the tips from the pool?

Restaurant proprietors and managers are not permitted to be a part of the tip pool. They can’t profit from tip pooling, but they can make it mandatory at their establishments.

3. Can supervisors join a tip pool?

This is generally rare, and the tip pool does not include managers or supervisors. Nonetheless, supervisors and managers are permitted to take part in certain states.

Have a quick question? We answered nearly 2000 FAQs.

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Tip Pooling Rules in Every State: What Restaurant Owners Must Know

Introduction

Laws of Tip Pooling

Federal Laws Governing Tip Pooling

What about the required service charges?

How about processing costs for credit cards?

State-specific Tip Pooling Laws

Keep your dining establishment safe from these expensive errors

Repercussions for breaking tip pooling regulations

FAQs

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