Tip Pooling in the US: The Law and How to Implement

Management 10 minute read 5th October 2020

Hospitality is one of the most common industries for tipping. Whether you’re running a busy hotel or bustling restaurant, chances are your staff are regularly handed a little bit extra by customers.

This is to say “thanks” for a job well done, and in instances where the customer believes the employee has gone above and beyond to provide the best possible service.

How tipping etiquette is changing

Unfortunately, the art of tipping has taken something of a hit thanks to the millennial generation. In the US, young adults aged between 18 and 37 are less likely to throw in a few extra bucks to say “thanks”, according to studies. Present them with a variety of tipping options, and one in six of this generation will go for the lowest. One in five won’t tip at all.

This is compounded by different tipping etiquette across the world. Studies suggest that people over in Britain are particularly confused by foreign tipping expectations, with some over-tipping to the tune of £78 when travelling.

Does this mean tipping is on the way out?

Far from it.

The same study discovered that older people are still generous tippers (nearly 55% of those aged 65 and older will tip 20% or more at restaurants), women are more generous than men (20% versus 16% median tip) and married couples are far more likely to tip than singles - particularly if they’re higher earners.

If you’re a restaurateur and want to find a fair and legal way of ensuring your employees receive the tips they deserve, tip pooling might be worth considering.

Welcome to our tip pool guide for US businesses!

How tip pooling works

The basic principle of tip pooling is for all participating employees to put all of their tips into one pot.

That pot is then used to divide the contents among the staff in a pre-defined way, be it based on hours worked, an equal division, the number of customers served or some other pre-agreed method.

Tip pooling in the US - the law

The Fair Labor Standards Act (FLSA) doesn’t impose a maximum contribution amount or percentage on valid mandatory tip pools. Despite this, employees can’t be required to pay more into the pool than is reasonable, and must be able to retain at least their minimum wage.

In some states, a written tip pooling policy between employees and the business is required to legally offset the minimum wage with any tips received.

Tip pooling policies aren’t allowed to be made mandatory, and business owners can’t ask staff to share their tips with the employer or members of the management team.

If you decide to implement a tip pool, you’ll need to:

  • Notify all tipped employees about the contribution amount;
  • Only take a tip credit for the value of tips received by each tipped employee; and
  • Ensure any of the other employees’ tips aren’t retained for any other purpose.

 Related Article: Further details: Fact Sheet #15: Tipped Employees Under the Fair Labor Standards Act (FLSA)

What about my state’s tip pooling laws?

Each state in the US has its own set of tip pooling laws, which may be different to those described in this guide.

It’s therefore a good idea to check with the laws in your state before implementing any form of tip scheme.

For instance, you might find that your state are far more strict, in which case you’ll need to follow them rather than the federal laws described above.

What are tip credits?

Tip credits enable you to pay employees a wage that’s lower than the federal minimum wage. The idea is the tips bring the employee back up to the minimum wage.

If you implement tip credits, just bear in mind that you’ll be restricted again by who can take part in the tip pool. For instance, only employees who regularly receive tips can participate in such circumstances.

Employees who regularly receive tips (think waiters and bellhops) will therefore benefit from the pool, but the likes of cooks, janitors and chefs can’t be included if you take a tip credit.

By not taking a tip credit, you can enable more people to participate in the tip pool. Non-tipped employees can be included, providing you pay tipped employees the full federal minimum wage or more.

Do you need a tip pool?

Tip pooling isn’t right for every hospitality business.

This is principally because some employees will love it while others will prefer other arrangements. But, that’s a perfect excuse to sit down with your team and speak to them about the tip arrangement that’ll best incentivise them and make them feel valued.

One of the most common reasons for implementing tip pooling is in businesses where there’s just one cash register into which customers pay. This makes working out who the tips belong to rather tricky, but tip pooling can avoid any disagreements or arguments.

There’s two other compelling reasons you might want to implement a tip pooling scheme at your business:

  1. An increase in the level of customer service. Tips work as an incentive for staff, and tip pooling is one of the best ways to reward them fairly for doing a great job. In turn, they’ll feel encouraged to continue raising their game, thus benefiting customers considerably.
  2. Encourages greater teamwork. Receiving tips shouldn’t be seen as a competitive sport (although healthy competition among your team is no bad thing) - it should encourage people to work together effectively. If a tip pool exists, it demonstrates the importance of working coherently and helping one another - and that can only be a good thing.

The concern many business owners have over tip pooling is that certain employees may wish to hold onto the tips they’ve earned themselves rather than have them distributed fairly among the team.

If that’s the case, it’s yet another reason to sit down and have a chat with your employees. By pointing out the benefits above, you might just sway them.

Finally: how to distribute tips in your business

Tip pooling, tip sharing or a combination of both? And should every employee be eligible for tips?

Now we’ve covered tip pooling in detail, we’d like to finish off by leaving you with the footings for your own tipping strategy.

Who should be included in tip pooling?

Tip pooling works best for employees who regularly receive tips from customers each month. Common examples are:

  • Counter staff
  • Servers
  • Bartenders
  • Bellhops
  • Bussers

Who should be included in tip sharing?

Tip sharing is best for employees who are unlikely to receive tips, but sometimes do. Common examples are:

  • Chefs
  • Cooks
  • Bakers
  • Dishwashers
  • Cleaners
  • Fixed POS operators

Should I exclude certain staff from tips?

Although this is a hotly contested area, these are the most common examples of staff who you might decide to exclude from tip distribution due to their level of responsibility or base remuneration:

  • FOH managers
  • Beverage managers
  • Food service directors
  • Marketing staff
  • General managers
  • Kitchen managers
  • Catering managers
  • Owners/Directors
  • President/CEO

Just remember: your tipping strategy is entirely up to you. The above is for guidance only. Write your own rules for tipping, but keep in mind the benefits of tip pooling; it’ll likely result in a far happier, more productive workforce.

 Further Reading: You’ve Built the Best Restaurant Team - Here’s How to Keep Them

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