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Tipped employees can use tip pooling to divide tips evenly at your business.

What Is Tip Pooling?

In many service industries, employees receive tips for their work. If your employees regularly receive tips, you could install a tip pooling agreement. Tip pooling encourages teamwork and equal pay at your small business. And, the importance of teamwork in an organization is almost unanimously recognized by small business owners.

The Fair Labor Standards Act (FLSA) determines the rules for tip pooling. Under a tip pooling agreement, tipped employees put part or all of their tips together. Then, they divide the tips evenly among each other.

Tipping out vs. tip pooling

Tipping out and tip pooling are similar ideas. With both, tips are collected and shared among employees. But, tipping out is somewhat different than pooling tips.

Tipping out happens between small groups of employees within the business. One server gives some of their tips to other employees. The server tips the employees because they were involved in the customer’s experience. For example, a waitress could give a busser 10% of the tip for clearing the table. Employees can tip out to other workers who do not normally receive tips, such as cooks.

With tip pooling, all tipped employees put their tips together and divide them equally. For example, employees might collect money in a tip jar and split it at the end of a shift. The entire staff works together to collect tips and split them.

Why pool tips?

Pooling tips helps when your business provides multiple services and one place to pay. When a customer leaves a tip, it might be unclear who the money was left for. In that case, a tip share system helps ensure all your employees are fairly paid for their work.

For example, several employees work at a coffee shop. One employee takes a customer’s order. Another employee serves the same customer the coffee. Both employees are involved in providing the service, so who deserves the tip? By pooling tips, both employees receive pay for their work.

Pooling tips can increase the level of customer service at your business. Tips are an incentive for the support staff, such as bussers and hostesses. When the support staff creates an enjoyable experience, all tipped employees may get larger tips.

Tip pooling encourages employees to work together. Servers and bartenders may be more willing to help with customers who are not theirs. The overall goal is for all tipped employees to earn larger tips so that everyone brings home more money.

Who can be in the tip pool?

Employees who regularly receive tips can be a part of a tip pool. Examples of tipped employees include servers, bussers, and bartenders.

Tip pools cannot include employees who do not regularly received tips. For example, dishwashers, cooks, and cleaning personnel cannot take part in the tip pool (as opposed to tipping out). Managers and employers also cannot be in the tip pool, even if they receive tips.

Sometimes, it can be difficult to know if a worker is an employee or a manager. If you are unsure, use the FLSA’s guidelines. Usually, a manager can hire and fire employees, create schedules, and maintain payroll records.

If you allow non-tipped employees or supervisors in the tip pool, you could face legal consequences. You may also face consequences if you keep tips for purposes other than tip pooling and distributing to employees.

You may need to pay the tips given to non-eligible employees back to the tipped employees. If you have a tip credit, you could lose it from incorrectly pooling tips.

What are the employer responsibilities?

As an employer, you have several responsibilities when it comes to tip pooling. You must notify your employees if they need to pool tips. You need to tell them about the tip pool contribution percentage. You can include this information in a tip sharing arrangement.

You can’t make employees pay more into the pool than what’s customary and reasonable. The employees must also keep at least enough tips to make the minimum wage.

For example, it’s normal for a server to tip out 15% to other employees (e.g., bussers). If your server tips out 15%, the arrangement is reasonable. But, if the server tips out 50% to other employees, that’s a red flag. Your tip pooling arrangement might not be legal. Check with your industry standards for a customary and reasonable percentage.

With Patriot’s online payroll software, you can record all your employees’ wages, including tips. To get you started, we offer free setup and support. Try it for free today!

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