In many service industries, employees receive tips for their work. If your employees regularly receive tips, you could use a tip pooling agreement at your business.
What is tip pooling?
In a business with a tip pooling agreement, participating tipped employees put part or all of their tips together. Then, the tips are divided among employees in a pre-determined manner. Employees might divide the tips based on hours worked, the number of customers served, equal division or some other pre-determined way.
To make tip pooling work at your business, you need to create a tip-pooling policy. Your policy should detail which employees must participate, how much they must contribute, and how the tips will be divided.
Should you have a tip pool?
Tip pooling can be beneficial, but some employees might dislike it.
If you run a business where customers pay at a single register, it might be unclear who the tips belong to. In this case, tip pooling lets all workers receive a share of the tips.
For example, several employees work at a coffee shop. One employee takes a customer’s order and another employee serves the coffee. The customer leaves a tip in a tip jar on the counter. Both employees served the customer, so who deserves the tip? By pooling tips, both employees receive part of the tip 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 might get larger tips.
Tip pooling encourages employees to work together. Servers and bartenders may be more willing to help customers who are not directly assigned to them. The overall goal is for all tipped employees to earn larger tips so everyone takes home more money.
Employees may be reluctant to share their tips with other employees. They might want to hold onto their hard-earned tips.
Tip pooling laws
When creating your business’s tip-pooling policy, you must consider federal and state laws.
Federal tip pooling laws
Federal tip pooling laws are regulated by the Fair Labor Standards Act (FLSA).
If you start a tip pool at your business, you must tell participants that they are in the pool. You must tell them how much they must contribute and how tips will be redistributed.
According to the FLSA, managers and supervisors cannot be included in a tip pool. Also, you, the employer, cannot keep any funds from the tip pool.
Outside of managers, supervisors, and employers, who can participate in the tip pool depends on whether or not you take a tip credit. A tip credit lets you pay employees a wage lower than the federal minimum wage. The reason you can take a tip credit for tipped employees is because the tip income should ideally bring employee wages back up to the minimum wage.
If you take a tip credit, there are more restrictions on who can participate in the tip pool. Only employees who customarily and regularly receive tips can be in the tip pool.
People who customarily and regularly receive tips might include waiters, waitresses, bartenders, bellhops, and counter personnel. If you take a tip credit, you cannot include people in the pool who don’t normally receive tips, such as dishwashers, cooks, chefs, and janitors.
If you do not take a tip credit, more employees can participate in the tip pool. You can include non-tipped employees in the tip pool as long as you pay tipped employees at least the full federal minimum wage.
When you do not take a tip credit, you can include tipped and non-tipped employees, such as waiters, waitresses, bartenders, bellhops, counter personnel, dishwashers, cook, chefs, and janitors.
State tip pooling laws
Each state can also set tip pooling laws. Be sure to check your state laws for tipped employees. If the state where you do business has laws that are more strict on tip pooling, you must follow your state laws.
If you want to implement tip pooling at your business, you need a clear policy. When you develop a policy, you may want to talk to a lawyer to help you follow federal and state laws.
You should ask all employees participating in the tip pool to sign a tip pooling agreement form. By signing the form, employees say they read and understand the tip-pooling policy.
Make sure you regularly allocate tips among your tip pool participants according to your policy. Do not add managers or supervisors to your tip pool. And, do not withhold any tips for yourself.
With Patriot’s online payroll software for small business, you can record all your employees’ wages, including tips. To get you started, we offer free setup and support. Try it for free today!
This article is updated from its original publication date of 4/25/2016.