Recent news of six-digit demands and lawsuits filed by the Department of Labor against multiple Oregon-based institutional restaurant chains has local businesses across the service industry wondering: “Are we tipping our employees properly?” The answer lies in the company’s tip-pooling policy and practices.
Federal law allows employers to require employees share or “pool” their tips with other eligible employees. In states like Oregon, where taking a “tip credit” to supplement an employee’s less-than-minimum wage is illegal, the employees eligible for the pool may include those who customarily receive tips – such as waiters, bartenders, bellhops – and those who don’t – such as dishwashers and cooks. Federal law does not impose a limit on the percentage or amount of the contribution each employee must make into the pool. And employers that administer a tip pool must fully distribute any collected tips at the end of the regular payday.
Given all of that, what is the problem? How are companies facing allegations that they unlawfully withheld hundreds of thousands of dollars in tips? It boils down to who is included in the tip pool.
Federal law prohibits employers from keeping any portion of an employee’s tips for any purpose, whether directly or through a tip pool. As such, an employer cannot require an employee to give their tips to an employer, a supervisor or a manager. So the question becomes: Who is a supervisor or a manager?
Every business has lingo defining the roles of their operation – whether a shift lead, an assistant manager, a manager on duty, etc. The titles mold to fit each business’ culture.
Critically, however, the person’s formal title does not matter as it relates to tip-pooling. Rather, a “manager” or “supervisor” is any employee:
- Whose primary duty is managing the enterprise or a customarily recognized department or subdivision of that enterprise.
- Who customarily and regularly directs the work of two or more other full-time employees or their equivalent.
- Who has the authority to hire or fire other employees, or whose suggestions and recommendations as to the hiring or firing are given weight.
Further, and of relevance to smaller mom-and-pop operations, if an employee owns at least 20% equity in the company, that employee is a manager/supervisor. If an employee meets any of these definitions of a manager or supervisor, they cannot participate in a tip pool.
As service industry professionals know, managers can wear many hats including that of a cook, a waiter and supervisor. Can a supervisor receive tips for direct service they perform? Technically, yes. Despite the prohibition on supervisors receiving tips through a tip-pool, supervisors can keep tips they receive from a customer for the service they directly and solely provide.
Given the recent enforcement actions, some, including the Oregon Restaurant and Lodging Association, recommend managers and supervisors refrain from taking tips at establishments where tips are pooled, even for service they directly perform. Such a conservative approach will help businesses avoid liability for conflicting with tip-pooling rules.
Although rooted in a desire to protect employees, the tip-pooling rules do not account for the reality facing many small businesses: Talented and dedicated supervisors and managers can be hard to find and even harder to retain. Paying those workers a higher base wage is a daunting expense for many small businesses.
Without the option of allowing supervisors to participate in tip pools, employers must think creatively about how to retain talent while complying with the law. Solutions may include incorporating service charges or implementing a profit sharing or other incentive plan to keep those key employees happy and competitively compensated.
