• Simple Guidelines on Making Your Tip-Pool Legal
  • June 26, 2009
  • Law Firm: Elarbee, Thompson, Sapp & Wilson, LLP - Atlanta Office
  • It is common in the hospitality industry for employees to share tips with other employees. In many instances, the practice of sharing tips is required as a condition of employment. Although common, not all practices comply with applicable law, but a successful, legal tip pooling arrangement can help control labor costs.

    Under federal law, and in many states, an employer can take a “tip credit” against a portion of the required minimum wage. Unfortunately, when tip pooling procedures violate the law, severe consequences can result. For example, an employer might be required to reimburse tipped employees not only for the amount of tips they contributed to a tip pool, but also for the amount taken as a credit against the minimum wage.

    In recent months a number of lawsuits have been filed alleging violations of the law as a result of improper tip pooling procedures. Such lawsuits involve a significant number of plaintiffs. As a result, the lawsuits can be extremely costly, both in terms of liability for back wages and liquidated damages, as well as interest and attorneys’ fees.

    While it is necessary to review your state’s laws (some states prohibit any mandatory tip pooling) as well as the FLSA’s requirements, there are several guidelines that will minimize the likelihood of legal liability for a tip pooling arrangement:

    1) Include only employees who “customarily receive tips” (which is defined by law). Typically, these are servers, bus boys, bartenders and the like. It would normally not include managers, kitchen staff, and those who do not regularly interact with customers.

    2) The tip-out requirement must be “customary and reasonable.” Generally, that is a tip-out of 15% or less of an employee’s tips. (Note: avoid basing a tip-out on a percentage of sales if doing so could result in the contribution reaching too high a percentage of the employee’s tips, for example, if an “employee’s sales” include merchandise items for which she would not normally receive a tip.)

    3) Ensure that after all contributions and sharing, employees do no fall below the state or federal minimum wage.

    4) Inform employees in writing that their tips will be credited toward the minimum wage and will be shared with other tipped employees.

    Tip pooling can present benefits to employers and employees, and no set of general guidelines can ensure compliance with the laws of every state.