Payroll

Sharing the Pool: Navigating the New Waters of Tip Pooling

September 6, 2018

Tip Pooling is one way restaurants try to ensure fair wages among staff. Learn about the Do's, the Don'ts, and the legislature surrounding tip pooling.

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Anyone who has ever worked in the service industry understands the impact of tips on their income.  In fact, many restaurants are careful when assigning tables to servers, in order to ensure even distribution.  If the workload is evenly distributed, it can encourage quicker turnover, which can result in more customers and more revenue for the restaurant, and—most importantly for the wait staff—more tips.

That process sounds lovely until a dispute breaks out among the restaurant workers because one worker took another’s tip.  This situation isn’t just a disagreement with money at its core.  It’s also a matter of a person’s perception of their own personality and how they treat customers.

Service workers take tips so personally because they view the tip as a reflection of their personality and hard work.  Therefore, taking another worker’s tip is akin to taking a piece of their pride.

So, what happens when you tell tipped employees their tips won’t be entirely their own, and that instead, they’re part of a tip pool?  For some employees, this may be well-received and for others pooling their tips may seem like a pay cut.  In order to understand both perspectives, it’s important to understand tipping, and have some clarity on tip pooling.

Tips on Tipping

Tip poolingA tip, also called gratuity, is a cash payment American service workers receive when a customer decides the worker met or exceeded the expectations of service.  Think of gratuity as being a monetary form of gratitude based on satisfaction with a service provided.

While tipping is commonplace for many industries in the United States, it’s not always appropriate for other cultures. Some cultures even consider tipping rude.  Nevertheless, Americans will often tip many service workers, even if it is not necessarily mandatory according to the rules of etiquette.

If we’re going to show our appreciation for a job well done, what’s the appropriate amount to tip service workers?

Studies show that even experts can’t agree on an exact percentage, but the appropriate rage is between 10-20%, depending on who you ask.  The amount to tip also depends on the service industry.  For example, some industries operate with a tip percent (restaurant servers), while others operate with a per-item tip (bellmen typically receive $2 for the first bag, and $1 per bag thereafter).

Minimum Wage and Tipping

tip pooling image 2One reason tipping is so commonplace is because people in the service industry have historically received lower pay rates than people in other positions across the economy.  Because of tipping, the gap between minimum wage and higher earnings has narrowed.

Once employers recognized their employees were exponentially increasing their wages with tips, they began pushing for legislature.  This push was for the ability to pay lower wages to their employees that were receiving tips.  Hence, the tip credit was born.  The tip credit is a provision that allows employers to pay tipped employees at a reduced rate.

Related:  The History of Compensation: Where Your Salary Came From

Still, the laws are meant to protect employees, and their right to fair wages remained in the threshold.  One of the mandates by the Fair Labor Standards Act (FLSA) is that employees, whether tipped or not, must make at least minimum wage.

The tip credit allowed employers to take a maximum credit of $5.12 per hour, which means they could pay their employees as little as $2.13 per hour, but only as long as their total wages were at $7.25 or more.

New Tip Pooling Regulations

After much deliberation surrounding the topic of tip pooling, recent legislation includes new tip pooling regulations.  This new legislation was spurred on by a proposal at the end of 2017, claiming that the 2011 tip pooling regulation (which put restrictions on tip pools) had contributed to the gap in pay between tipped and non-tipped employees.

tip pooling image 3In other words, disallowing tip pooling meant that servers, for example, were paid significantly more than bussers, dishwashers, and other non-salaried positions in a restaurant.  One of the topics addressed in the new legislation pertains to tipping and minimum wage.

According to the new regulations, if an employer pays the higher minimum wage, tipped employees may share with non-tipped employees.

Who may take a dip into the tip pool

It’s obvious that servers at restaurants will receive tips, but bussers and hosts may also share in a tip pool.  Different industries also have employees who are certain to receive tips (bellmen at hotels), and then those who may or may not receive tips (housekeepers at hotels).

There are, however, certain members who may not partake in the pool:  employers, managers, and supervisors.  In fact, should an employer, manager, or supervisor try to take tips from service workers, they could be fined up to $1,100 per violation.

Whirlpools in the tip pool

If your head is spinning while you try to wrap your head around all there is to know about tipping, the easiest things to remember are those not to do to avoid being swept down into a tip pooling whirlpool.

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Don’t use tip pooling as an excuse to pay employees less than minimum wage.  You’ve probably heard the old adage that you get what you pay for.  The same thing can be said about paying employees.

If you want to be competitive in hiring and retaining employees, don’t devalue them by severely undercutting minimum wage, even if they are going to be receiving tips.  More importantly, you may legally only mandate tip pooling if the employees first receives minimum wage as their base pay.

Related:  Pre-Tax Me, Please! The Ins and Outs of Payroll Deductions

Don’t try to divide tips among CEOs, managers, supervisors, or directors.  Basically, if anyone receives a salary well above minimum wage, you should exclude them from receiving anything from the tip pool.

Don’t forget to provide the tipped employee with information regarding the tip credit, if you plan to use the FLSA tip credit.

The information the employee needs regarding tip credits includes:

1) the employee’s cash wage (which may not be less than $2.13 per hour).

2) the tip credit the employer is taking (which cannot exceed $5.12 per hour).

3) that the tips the employee receives must exceed $5.12 per hour (if an employer takes the entire tip credit).

4) that the employee will receive all tips earned (except in the case of a tip pool).

5) that the tip credit will not be instated unless the employee is aware of these prior four clauses.

Don’t let one employee do all the work.  Remind employees that each worker’s contribution to the tip pool is important.  If only a couple of servers are working hard for tips, then they will eventually realize that they can go elsewhere for a more profitable job, even if they are contributing to a tip pool at their new place of employment.

Also, if the hard workers leave, then everyone else will have to not only pick up the slack for their own tables, but they will have to make up for the lost team member.  A best practice is to always be practicing.

Keeping it in the green

So that we don’t end on a negative, here is a do to remember:

Do be sure that your employees understand and are satisfied with the current arrangement.  Whether contributing to a tip pool or not, happy employees make customers happy, and happy customers make you money.


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