Tips are a part of restaurant life in most North American cities and small towns. From mandatory gratuities for large groups, to adding change to a tip jar at your local café, tipping methods are all around us. And whether you’re for or against rewarding or incentivizing good service, many hospitality workers subsidize their wages with tips.
But tips don’t have to be just a sweaty $5 bill left on a table after a quick meal. There are different ways to distribute tips among employees , with tip pooling as a primary method.
Ahead, we’ll get into the nitty gritty of what tip pooling is, how it differs from tip sharing, what the current federal and state laws say about tip pooling and tip distribution among employees, and some mistakes to avoid when enacting and enforcing a tip pooling policy.
Tip pooling is the policy or practice of a business—often a service-based one, like a restaurant—collecting all of the tips employees have earned during their shift and re-distributing them to staff . The distribution amount is predetermined beforehand, but often it’s evenly split between those who collected the tips.
Tips in the pool are redistributed back to employees who are eligible to receive them, like other servers. Other roles, like hosts, bussers, food runners, also get a percentage of the tip pool redistributed to them. And of course, the kitchen staff and bartenders also receive a cut for their hard work.
One of the benefits of tip pooling is that employees don’t feel competitive with each other to make the most in tips. All of the tips that come into the business are the result of good service performed by everyone who touches a table—from host, to server, to food runner, to busser.
Another way hospitality and service businesses handle tips is through tip sharing. Tip sharing primarily focuses on ensuring the people who received the tips—most likely servers—get the largest amount of the tip back, but they tip out a small percentage to other parts of the business.
An example of this is a server receiving $300 in tips for a dinner shift. They tip out $20 to the bar team and $20 to the hosts and/or food runners. When there are multiple servers, the tip sharing amounts grow for each other unit in the business.
One other way a tip can be given to an employee is through a tip credit. A tip credit is when an employer calculates what tip an employee may receive and includes this in their wage. According to the Fair Labor Standards Act (FLSA), the federal minimum wage is $7.25. If someone’s wage were above that—say $10—and the tip credit was $4, the employer would be responsible for allotting $6 of that as a labor cost to pay for the wage.
Employers are legally required to disclose if a wage includes a tip credit.
Want to read more on the pros and cons of tipping out? Learn more about the different methods and what to look out for.
According to US law, a tipped employee is someone who makes more than $30 per month in tips. Tips mean anyone who’s paid a gratuity for their work, like servers, baristas, and bellhops.
Tips are paid on top of the allotted amount a customer is paying for. So, as an example, a customer with a $100 bill at a restaurant has the option to tip the server on top of that for providing excellent service during the meal. In the US and Canada, it’s customary to tip at least 15%, if not more commonly 18% or 20% for really excellent service.
This is one example of a federally enacted law that has a broader impact on tip pooling. Businesses that want to have a tip pooling policy in place need to adhere to both federal and state laws on the matter. Next, we’ll get into other federal tip pooling laws and a few examples of state tip pooling laws.
At the federal level, tip pooling laws are pretty clear and concise, both to protect you and your employees who receive tips.
A few federal tip pooling laws to watch out for:
On top of federal tip pooling laws, state tip pooling laws may apply to your business. These are affected by different state minimum wage policies, and they differ state-by-state. Some states follow the federal tip pooling laws, but some have their own regulations, and it can be tricky to keep track. At any point, it’s best to consult with a professional accountant or lawyer to make sure you’re up-to-date on the latest regulations.
A few examples of state tip pooling laws:
If you’re thinking about creating a tip pooling policy at your business, there are a lot of great benefits: less competition for staff, encouragement to help each other out, and an increased sense of responsibility. With tip pooling, you’re working together to get better tips for everyone.
Pointing to the benefits of tip pooling is one thing, but look to other considerations to fully weigh the option of creating a tip pooling policy. Some considerations could include how tips are distributed (shifts, role, etc.) or the state your business is in and if there are any other legal parameters you need to understand.
Here’s a breakdown of key aspects to consider before instituting a tip pooling policy.
Where do we see tips talked about the most? Restaurants or high-touch hospitality jobs. Many servers and other front of house service roles have tips as part of their income. Tip sharing and tip pooling are ubiquitous in the restaurant industry. But they aren’t the only service sector to include tips as part of an employee’s income. Other roles include bartenders, barista, hotel service staff (including concierge, housekeepers, and in-room service attendants), hair dressers, and aestheticians. Any service role could reasonably be considered for tip pooling.
As an employer or supervisor in the business, it’s important to understand if tip pooling makes sense for your specific industry and your company.
State laws are a serious consideration for tip pooling. If your business ignores those laws, or isn’t aware of them, there could be costly consequences.
Thoroughly research your state’s specific laws to understand if a) there’s any difference from the federally mandated ones, and b) if there are nuances that need to be understood before implementing a tip pooling policy. For instance, in North Dakota, employees need to vote on a tip pooling policy, with 50% plus one voting in favor for it to pass.
So what is an example of a tip pooling policy, and how might it work? Tips in the tip pool can be distributed a few different ways. Consider the following before putting a tip pool policy in place:
1. Hours worked: Some businesses offer a bigger share of the tips from the tip pool based on hours worked during that period.
2. Role: In this distribution plan, different roles in the business are awarded points and the tips are paid out based on this point system. You’ll total the tips aand divide accordingly by points.
3. Seniority: In some cases, employees with longer tenure—and therefore more experience at the business—may get more of the tips from the tip pool in that period. Meanwhile, new hires might get less tips because they’re new to the biz or new to that particular business.
Tip pooling is predicated on trust. Because tip pooling is about bringing everyone’s tips together to redistribute, your employees need to know that what they worked hard to earn isn’t going to be lost or considerably downsized.
When starting the tip pooling policy, bring your employees in on the process so they can understand how it works, why it works for them, and how you’re going to manage their tips in a way that’s favorable for both the company and them. Then, make sure you communicate it thoroughly and document it in your company onboarding info—which leads us to our next point.
Keep employee communication top of mind when it comes to tip pooling. That means letting employees know:
When making updates, use a company chat function for real-time communication that everyone will receive instantly.
For employers or supervisors overseeing the tip pooling policy, it’s important to figure out how to track, report, and maintain records of the tip pool for accuracy. Consider which tools or software you may need that will help you keep an efficient tip pooling record.
No policy or action is without mistakes. If possible, try to avoid the following when it comes to tip pooling.
It’s important to keep up-to-date on both federal and state tip pooling laws. Some states more heavily regulate tip pooling over others.
At the federal level, if an employer breaks provisions laid out in the FLSA, you’ll most likely incur fines. You’ll also be responsible for paying employees what they’re owed. A key way to keep on top of your tip pooling is to streamline the process with tools capable of tracking tips in the tip pool each pay period.
You may wonder: in what states is tip pooling illegal? There is no simple answer. Many states don’t diverge from the federally mandated laws on tipping. That said, there are still a number with different rules and regulations.
Here is a complete list of states with resources on their specific tipping laws:
Tip pooling is a business choice that affects your whole team. If your business is in the hospitality or restaurant sector, you can now make informed decisions that adhere to your legal obligations. Tip pooling doesn’t have to add extra math to your plate, either.
Do away with spreadsheets and manual tracking to mitigate mistakes and speed up your process. Homebase can help you track your tips with ease so that payroll is a breeze, and you can use our messaging tool to loop your team in on all the important conversations. If you’re looking to simplify your small business operations and handle everything from time tracking to tipping to payroll, Homebase is right for you.
Stay in sync and work better together.Stop chasing down phone numbers with our built-in team communication tool. Message teammates, share updates, and swap shifts — all from the Homebase app.
