What is tip pooling?
Tip pooling refers to when a business or establishment combines all employee-received tips into a pool. Then, employers distribute the tips evenly to all employees included in the tip pooling.
The tip pool generally only includes tipped employees, such as servers and waiters, but some businesses expand their tips to include non-tipped employees, such as cooks and hosts. Governing bodies, such as the state labor departments or the Fair Labor Standards Act (FLSA), impose regulations on tips and tipping pools to ensure fairness.
Read more: The Fair Labor Standards Act (FLSA): What Employers Should Know
How do you pool tips?
Tip pooling generally includes regularly tipped employees who work in establishments, such as restaurants, bars, coffee shops and spas. According to the FLSA, tipped employees are those who regularly earn more than $30 per month. This often includes employees, such as servers, baristas, hairdressers and estheticians. Some establishments opt to include non-tipped employees, such as dishwashers, hosts and cooks.
There are a variety of ways to determine how tips are distributed. Employers should create a policy that explains points, such as whether tip pool contributions are mandatory, which employees are eligible and how tips are distributed. Some common methods of tip distribution include:
- Hours worked
- Customers served
- Points system
- Percentage system
Tip pooling vs. tip sharing
The main difference between tip pooling and tip sharing is that tip sharing refers to distributing pooled tips to non-tipped employees. Tip pooling refers specifically to pooling and distributing tips to tipped employees.
Tip sharing refers to tip pools that include both tipped and non-tipped employees. It’s an option for businesses operating in states that don’t allow non-tipped employees to be included in tip pools, but it’s important to be mindful of FLSA regulations in these cases.
Tip pooling policies, laws and rules
Tip pooling is subject to regulations imposed by the FLSA. It’s also important to consider the state the business operates in, since most states have their own laws regarding tipped employees and tip pools.
Under FLSA regulations, employers, managers and supervisors may not claim tips from a tip pool. Employers may only use tips to apply as a credit against the employee’s federal minimum wage. The FLSA imposes a federal tipped minimum wage of $2.13 per hour. This means the maximum tip credit that an employer can claim is $5.12 to meet the overall federal minimum wage of $7.25 per hour. Many states have their own version of this law but with higher minimum wages, so be sure to check your state labor laws.
The FLSA approves valid tip pools that include a sharing agreement among regularly tipped employees. It does not approve tip pools with non-tipped employees. This means that if you do choose to distribute tips to non-tipped employees, you first need to make sure you satisfy the regulations and minimum wages of the tip pools to regularly tipped employees.
Employers are subject to other rules under the FLSA as they relate to tip retention, dual jobs, service chargers and credit card fees. These rules are detailed on the FLSA fact sheet.
Employers must also provide FLSA-mandated notice to tipped employees that includes information like:
- Cash wage paid to employee
- Employer’s tip credit claim
- Consistency between tip credit claim and tips paid
- All tips earned by the employee are retained, except for valid tip pooling agreements
- Confirmation that employees are notified when the employer uses their tips for a tip credit
Benefits of tip pooling
Motivates employees
Distributing tips evenly to all employees according to a set method may motivate employees to be more productive. It can boost the morale of employees who may struggle with their duties and tasks and are working to overcome these obstacles.
If some employees are highly motivated to maximize tips, they may likewise motivate their team members around them.
Related: What Motivates People at Work: Methods for Motivating Teams
Encourage employee teamwork
Tip pools can help encourage teamwork and collaboration. Employees bring diverse and unique skill sets to the workplace, and collaborating helps teams take advantage of all these skills.
Consider servers who are especially skilled with customer service, but rely on the support of other skilled employees to ensure customers receive quality meals in a timely manner. This can boost productivity and efficiency.
Read more: A Guide to Promoting Teamwork in Your Organization
Employee responsibility
If teams are collaborating, this can help encourage more responsibility in individual employees. Employees are more accountable to their teams, so everybody can succeed.
Disadvantages of tip pooling
Damage high-performing employee morale
If high-earning employees are used to retaining all of their tips, they may be unhappy with sharing those tips with lower-performing employees. They may become resentful or less productive. You may be able to offset this by making tipping pools voluntary.
Hurt employee accountability and workplace environment
In some cases, employees may feel like members of the team are not contributing equal effort to productivity and earning tips. Teams may face misalignment of those who are productive and resentful of others who are less concerned. To avoid these conflicts, it’s important to communicate with employees and ensure that everybody is on the same page.
