For those employers who employ “tipped employees,” i.e., employees who generally receive $30 or more per week in tips, a tip pooling arrangement may have some appeal. After all, such arrangements allow for an equitable distribution of tips to employees who may not directly interact with customers. While tip pools certainly have their appeal, they have also drawn close scrutiny from regulators and disgruntled employees.

Keep in mind that some state laws ban or significantly restrict tip pooling arrangements. The federal Department of Labor (DOL)approves of tip pooling, but as you may expect, there are a number of strings attached to tip pools. Employers must notify tipped employees of any required tip pool contribution amount, may only take a “tip credit” toward the payment of the minimum wage for the amount of tips each tipped employee ultimately receives, and may not retain any of the employees’ tips for any other purpose.

Furthermore, employees sharing in the tips must somehow participate in serving the customers who left the tips. In determining whether employees participated in serving the customers who left tips, the DOL and the courts look to whether the employees interacted with the customers, assisted in providing a pleasurable dining experience, and whether the employees provided direct table service during the meal. Employees who might properly share in tip pools include:  servers, bussers, bar-backs, service bar tenders and hosts. A valid tip pool may not include employees who do not regularly and customarily receive tips, these employees might include:  janitors, dishwashers, chefs and cooks.

Furthermore, because the Fair Labor Standards Act (FLSA) prohibits employers from withholding tips, managers may not participate in tip pools. The theory is that managers, and even some supervisors, are agents of the employer and are therefore prohibited from participating in the tip pools. Several employers, including Starbucks, who was hit with a $105 million judgment, have learned this lesson the hard way. As these employers have learned, class action lawsuits challenging tip pooling practices are becoming more popular.

As noted above, employers with tipped employees may also seek to take credit for those tips toward the minimum wage requirement. Again, however, there are restrictions on an employer’s ability to apply the tip credit. An employer may take the tip credit for some time that the tipped employee spends in duties related to the tipped occupation, even though such duties are not by themselves directed toward producing tips. However, the DOL takes the position that if tipped employees spend more than 20% of their time performing non-tipped duties such as general preparation work or maintenance, no tip credit may be taken for the time spent performing these duties. Furthermore, if an employee is employed in both a tipped and a non-tipped occupation, such as an employee employed both as a maintenance person and a waitperson, the tip credit is available only for the hours spent by the employee in the tipped occupation.

The DOL also requires employers to provide notice to tipped employees of the requirements of the FLSA’s tip credit provisions before using the tip credit toward the FLSA’s minimum wage requirements. An employer must provide the following information to a tipped employee before the employer may use the tip credit: 

• the amount of the employee’s cash wage, 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 cash wage of $2.13 and the current minimum wage of $7.25);
• the tip credit claimed will not exceed the amount of tips actually received by the tipped employee;
• 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
• the tip credit will not apply to any tipped employee unless the employee has been informed of these tip credit provisions.

Employers with tipped employees should review their pay practices, especially if they use tip pools or take a tip credit toward the minimum wage requirement, to ensure compliance with both state and federal law in light of the increased popularity of class-based claims and regulatory restrictions.