What Is Tip Pooling: Understanding the Practice and Tip Pooling Laws

Conversations about labor and workplace fairness in the restaurant industry continue to be a hot-button issue. Among the many questions that arise, one is repeated often: What is tip pooling?

Tip pooling is a practice that can simultaneously empower and polarize, depending on the establishment and the management. Tip pooling laws are designed to increase fairness, but before taking the plunge yourself, it's best to weigh all the pros and cons to see if it makes sense for your team.

What is tip pooling?

Tip pooling is when all or an agreed-upon portion of the tips from the entire team are collected and redistributed at least as often as every pay period. The redistribution is guided by tip pooling laws via the Wage and Hour Division of the Department of Labor, and it's a decision that the restaurant staff would have ideally agreed upon and helped design. Calculations for the redistribution of tips in a pool can vary, especially among states that pay a full minimum wage to all employees and states where operators can take the tip credit and pay a service wage.

Why do businesses use tip pooling?

In restaurants where tip pooling is transparent to all stakeholders and the management team takes the time to truly manage the process, a common result is increased teamwork and collaboration. Forming teams where every member pitches in and believes in the work is a challenging task, but magic can happen when the right group agrees to completely share the workload.

Tip pooling can also eliminate team member concerns about what section they'll be working for the shift, as well as table sizes or how quickly their section is filled. Eliminating these concerns and any tension among staff members allows the team to focus on the overall restaurant operation.

Restaurant staff may have mixed feelings about tip pooling policies, so it's important to be mindful in order to avoid feelings of resentment—for instance, when they notice their counterpart is having an "off night" and underperforming.

What are the tip pooling laws?

Navigating tip pooling laws is about being informed and aware. When thinking about tip pooling, consider the following:

• State labor laws: Know your state labor laws, especially those regarding federal minimum wages for tipped employees. States where operators can take a tip credit, need to closely monitor tip totals for the team to ensure that any pooled tips are still within the legal minimum wage. States can dictate whether or not a mandatory tip pool is allowed, so in some areas, tip pooling might need to be recommended.
• Participation: Tip pooling can be used with heart-of-house employees who are generally not in tipped positions, such as cooks or dishwashers, but only if the employer is paying full minimum wage to all employees. Taking the tip credit is not allowed in a mandatory tip pool situation. Additionally, restaurant owners, managers, and supervisors should not participate in a tip pool.
• Fair labor laws: The Fair Labor Standards Act does not dictate the percentage or amount members need to contribute to a tip pool, but it does require restaurants to inform all team members of the agreed-upon percentage or amount. Frequency of tip distribution needs to take place within every pay period at the very least, and restaurant operators may also not use tips for any purpose other than redistributing to the employee or employees that earned them.
• Minimum wage: Team members who serve dual roles during a shift should receive full minimum wage for the hours when not performing duties that are not tipped.
• The 80/20 rules: According to the National Law Review, the 80/20 rule states that a team member is still eligible for the tip pool if they are performing duties that support the work of directly making tips. However, this is only the case when those tasks make up 20% of their shift. Normal side work for servers, for instance, includes managing ingredients for salads, beverages, condiments, etc.

Did you know? SpotOn's labor management software, Dolce, provides tools that help businesses maintain compliance with the 80/20 tips rule going into effect in 2022. With a combination of tips policy guidelines, tipped wage tracking, and employee attestations on clock-out, operators can vastly simplify the complex requirement tracking prescribed by the 80/20 rule.
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How should you manage the tip pooling process?

Restaurant managers need to be transparent about the tip pooling process, the calculations for distribution, and all other details in order to maintain the benefits of having a tight team. Managers are often stretched thin, and adding several hours weekly to managing the tip pooling process can be too much if it's "one more thing" added to their plate.

Instead, utilize restaurant labor management technology to help with the process. When integrated with your point-of-sale system, it can reduce the time you spend on calculations and planning to just minutes. It can also offer managers and restaurateurs reports and sales figures to present to their teams so they can help serve as support for the agreed-upon tip pool calculations.

The transparency can begin as early as setting up the calculations for the tip pool. Have a dialogue with your team and be sure they are heard in the negotiation of percentages used for calculating what positions will receive a specific portion of collected tips. Take a close look at job descriptions and the actual duties performed by all team members. Does your busser also serve as a food runner? Does your lead cook also help with the expo position? Know these details to see which positions have a clear and significant role in supporting directly tipped members.

Plan tip pools in a thoughtful way by keeping state and federal laws top of mind. Focus on compliance management, work with your team on creating pooled tip policies, and use software solutions and back-office reports to maintain clean records and fair, consistent distribution of tips.