Many hospitality businesses, such as restaurants and bars, have found themselves restructuring their daily operations in light of the current global COVID-19 health crisis, and the subsequent federal, state, and local shelter in place orders. For instance, where restaurants and bars once served customers on a dine-in basis, perhaps they are now restricted to take-out only or delivery options, and, as a result, many employers who are still operating in the wake of the pandemic now have very few employees with customer-facing roles.

Because of the necessary changes in daily operations, many businesses are reconsidering their tip policies. Perhaps your policy was to allow employees to keep all tips he or she earned, which now seems unfair to employees who are integral to serving customers but no longer have direct customer contact so you want to shift to a tip pool model. Perhaps you have always operated on a tip pool model, but with ever-shifting job duties and positions, you are unclear whether your tip pool policy is legally compliant. Whatever the case, one thing is certain: given that daily operations of customer-service oriented businesses has likely changed and will continue to change as our country slowly moves toward reopening, now is the perfect time to revisit some important considerations if you are thinking about shifting to a tip pool model or even if you already have one.

The information provided below focuses on federal law and California law. However, it is important to note that your state may have unique requirements. Whatever your business’s unique circumstance, Epstein Becker & Green, P.C. can help you navigate tip pooling.

What is a tip?

Federal definition: A tip is a sum presented by a customer as a gift or gratuity in recognition of some service performed for him. It is to be distinguished from a payment made for the service. Whether a tip is to be given, and its amount, are matters determined solely by the customer. 29 CFR 531.52. Tipped employees are employees who customarily and regularly receive more than $30 per month in tips. 29 U.S.C.A. § 203(t).

California Definition: A tip or “gratuity,” as defined by the California Labor Code, is money a customer leaves for an employee (or employees) over the amount due for the goods sold or services rendered. Cal. Lab. Code § 350(d).

The basic rule is that tips belong to the employee. Employers are prohibited from using an employee’s tips for any reason other than as a credit against its minimum wage obligation (known as a “tip credit”) or in furtherance of a valid tip pool. California note: tip credits are not permissible under California law.

What is tip pooling?

Tip pooling involves taking tips earned by all employees during a certain period of time and redistributing them amongst other employees based on a pre-established formula. The employer must inform employees of tip pooling requirements and may not retain any of the tips for any other purpose. 29 C.F.R. § 531.54.

Is compulsory tip pooling legal?

Yes. Under federal and California law, employers can require employees to participate in tip pooling. See 29 U.S.C.A. § 203(m); Oregon Rest. & Lodging Ass'n v. Perez, 816 F.3d 1080, 1082 (9th Cir. 2016); Cal. Lab. Code § 351.

Who can participate in the tip pool?

It depends on whether the employer wishes to take a tip credit towards its minimum wage obligations.

Under the Fair Labor Standards Act (FLSA), an employer may take a tip credit toward its minimum wage obligation for tipped employees. 29 U.S.C.A. § 203(m). The tip credit must be equal to the difference between the required cash wage (at least $2.13 per hour) and the federal minimum wage of $7.25 per hour. As such, the maximum tip credit is $5.12 per hour ($7.25 minimum wage minus the minimum required cash wage of $2.13).

If the employer wishes to take the tip credit under the FLSA, the persons who can participate in the tip pool can include only employees who customarily and regularly receive tips. For instance, such employees would include waiters, bussers, bartenders, bellhops, and counter employees who serve customers. Employees who do not customarily and regularly receive tips, such as cooks, chefs, and dishwashers, may not participate in the tip pool.

On the other hand, if the employer does not take a tip credit for any tips received under the FLSA and pays its employees the minimum wage, it can include in the tip pool employees who do not customarily and regularly receive tips. In many circumstances, such employees would include back of house employees.

In California, Labor Code § 351 permits mandatory tip pooling with employees who either provide direct table service or are in the “chain of service.”

What persons cannot participate in a tip pool?

Federal law prohibits employers from keeping any portion of the tips or from including supervisors or managers in the tip pool. This is true regardless of whether the employer takes a tip credit or pays employees the full minimum wage. 29 U.S.C. § 203(m)(2)(A). Similarly, California law does not permit the employer or any "agents" of the employer to share in the tips. Cal. Lab. Code § 351; Jameson v. Five Feet Restaurant, Inc., 107 Cal. App. 4th 138 (2003).

What additional considerations should I be aware of?

  • Under federal law, employers must comply with a notice requirement if they intend to take a tip credit. The employer must notify the tipped employee, orally, or in writing, of the following:
    1. the amount of cash wage the employer is paying the tipped employee (which must be at least $2.13 per hour;
    2. the additional amount claimed by the employer as the tip credit (which cannot exceed $5.12 per hour);
    3. the tip credit claimed by the employer cannot exceed the amount of tips actually received by the employee;
    4. that all tips received by the tipped employee are to be retained by her except for a valid tip pooling arrangement limited to employees who customarily and regularly receive tips; and
    5. that the tip credit will not apply unless the employee has been informed of these provisions.
  • There are unique provisions regarding tip credits for employees who split time between job duties where tips are customarily and regularly earned and job duties where they are not. If the non-tipped work is related to the tipped work, the employer may take a tip credit for all hours worked. But if the non-tipped work is not related to the tipped work, the tip credit is limited to those hours in which the tipped work is performed. 29 C.F.R. § 531.56(d).
  • States often have different rules when it comes to tip credits. Please reach out to an attorney at Epstein Becker & Green, P.C., to ensure compliance with the unique requirements of your state.
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