Tip Pooling Law: Understanding The Law, When It Is Legal and Illegal, And Examples

Tip pooling is a common practice in industries where employees work together to provide customer service, such as restaurants, bars, and hotels. By combining all collected tips and distributing them among eligible staff members, tip pooling aims to create a fairer environment, rewarding not just servers but also the support staff who contribute to a positive customer experience. However, the practice is governed by complex federal and state laws, which vary widely and have specific restrictions on who can participate in a tip pool. In places like California, where tipping laws are particularly strict, improper handling of a tip pool can lead to serious legal consequences for employers.

This article provides a comprehensive guide to understanding tip pooling, including the laws that regulate it, the distinctions between tip pooling and tip sharing, and practical examples of both legal and illegal practices. For employees and employers alike, understanding these regulations is essential to ensure fair and lawful handling of tips, prevent potential disputes, and maintain compliance with labor laws.

By Brad Nakase, Attorney

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Table of Contents
Tip Pooling Law: Understanding The Law, When It Is Legal and Illegal, And Examples
1. What is Tip Pooling?
2. Laws Governing Tip Pooling
3. How Does Tip Pooling Work?
4. Who Can and Cannot Participate in Tip Pools?
5. How to Split Tips by Hours Worked or Role
6. Tax Implications of Tip Pooling
7. Tip Pooling vs. Tip Sharing
8. Common Questions: Can Salaried Managers Collect Tips?

1. What is Tip Pooling?

  • Definition: Tip pooling is the practice of employees combining all their tips, which are then distributed among eligible employees according to a set formula.
  • Purpose: This practice is often used in industries like restaurants, where a team of employees (e.g., servers, bussers, bartenders) works together to deliver a positive customer experience.
  • Example of When Tip Pooling is Illegal: If a California restaurant includes a manager in the tip pool, it would be illegal. California law prohibits salaried managers and supervisors from collecting a share of tips designated for hourly employees who serve customers directly.

2. Laws Governing Tip Pooling

  • Federal Law (Fair Labor Standards Act, FLSA): Under the FLSA, employers can allow tip pooling among employees who regularly receive tips. However, tip pools cannot include employees who are traditionally “non-tipped” (e.g., dishwashers) if the employer takes a tip credit, meaning they pay tipped employees below minimum wage, relying on tips to make up the difference.
  • California Law: California law allows tip pooling, but it has stricter guidelines. It prohibits employers and managers from collecting or taking a share of employees’ tips. The law also mandates that only employees who contribute directly to customer service (e.g., servers, bartenders, bussers) are eligible to participate in a tip pool. California employers are not allowed to use a tip credit, meaning tipped employees must be paid at least the state minimum wage before tips.
  • Example: In a California restaurant, a tip pool might include servers, bussers, and bartenders, as they all contribute directly to the dining experience. However, it cannot include kitchen staff who don’t interact with customers. Additionally, managers and supervisors are not allowed to participate in or collect from the tip pool.
  • Example of When Tip Pooling is Illegal: In California, if a tip pool includes kitchen staff who do not interact directly with customers, this would be illegal. Under state law, only employees who provide customer-facing service are allowed to participate in the tip pool.

3. How Does Tip Pooling Work?

  • Process: In a tip pool, employees put all tips into a central “pool” at the end of a shift. The tips are then distributed based on a predetermined formula, which could be by hours worked, job role, or a set percentage for each position.
  • Example: Let’s say a restaurant collects $500 in tips in one shift. The restaurant’s policy might allocate 60% to servers, 20% to bartenders, and 20% to bussers. If there are five servers, two bartenders, and three bussers, the $500 would be split among these groups based on their roles, with individual shares calculated accordingly.
  • Example of When Tip Pooling is Illegal: Suppose a California restaurant includes all employees in the tip pool, including salaried kitchen staff and managers. This arrangement would be illegal because California law restricts tip pooling to employees who contribute to customer service, and salaried managers are not allowed to participate.

4. Who Can and Cannot Participate in Tip Pools?

  • Eligible Employees: Typically, tip pooling includes employees who interact with customers, such as servers, bussers, bartenders, and barbacks.
  • Ineligible Employees:
    • Managers and Supervisors: Federal and state laws generally prohibit salaried managers and supervisors from participating in tip pools. This is to ensure that tips go to the employees providing direct customer service, rather than those with authority over staff.
    • Non-Tipped Employees: In states that allow a tip credit, non-tipped employees like kitchen staff cannot receive a share of the tip pool. However, in California, because tip credits are not allowed, non-tipped employees may sometimes be included in tip pools if they contribute to customer service.
  • Example: In a California café, the tip pool might include baristas and bussers who interact directly with customers, but the manager overseeing operations would be excluded from the pool. In other states, only directly tipped employees may participate, so roles without direct customer interaction might not be eligible.
  • Example of When Tip Pooling is Illegal: In a California restaurant, if a tip pool includes back-of-house kitchen staff who do not directly interact with customers, the tip pool would be illegal. California law specifies that only customer-facing employees can participate in a tip pool, excluding kitchen staff who are not directly involved in customer service.

5. How to Split Tips by Hours Worked or Role

  • Hours-Based Splits: One common approach is to split the tip pool based on the hours worked. This means employees receive a share proportional to the amount of time they spent working during that shift.
  • Role-Based Splits: Alternatively, tips can be divided by role, with a larger share going to positions with higher tipping expectations (e.g., servers) and smaller shares to supporting roles (e.g., bussers).
  • Example: In a role-based split, if the total tip pool is $600, the restaurant might decide that servers receive 60%, bartenders 25%, and bussers 15%. If three servers, two bartenders, and two bussers are on shift, each role’s allocated share is further split among employees in that category.
  • Example of When Tip Pooling is Illegal: Suppose a restaurant in California decides to give the manager a percentage of the tip pool based on their supervisory role. Even if the manager worked a full shift, this would be illegal, as managers are not eligible to participate in the tip pool regardless of hours worked or role.

6. Tax Implications of Tip Pooling

  • Taxable Income: Tips distributed through a tip pool are considered taxable income for employees, and employers are required to report and withhold taxes on these amounts.
  • California Tax: Tips in California are subject to state income tax as well as federal tax. Employers must report and withhold taxes from tip income, and employees must report these amounts accurately on their tax returns.
  • Example: An employee who receives $200 in tips through a tip pool will have that amount included in their taxable income. The employer will withhold income tax and Social Security tax on this income, and the employee will need to report the $200 as part of their total income when filing taxes.
  • Example of When Tip Pooling is Illegal: If an employer in California collects tips into a tip pool but fails to report or withhold taxes on these tips, it would be a violation of both federal and state tax laws. Tip income must be reported accurately, and taxes must be withheld according to IRS and state guidelines.

7. Tip Pooling vs. Tip Sharing

  • Tip Pooling: As described, tip pooling combines all tips into a central pool, distributed among eligible employees.
  • Tip Sharing: Tip sharing usually means that employees keep their individual tips but are required to share a portion of those tips with specific coworkers (e.g., bartenders sharing tips with barbacks).
  • Example: In a tip-sharing system, a server might keep their tips but is required to give 10% to the bartender and 5% to the busser. In a tip pool, all tips would be combined, and then everyone would receive a predetermined portion based on policy.
  • Example of When Tip Pooling is Illegal: If a California employer requires employees to engage in tip sharing with non-customer-facing staff, such as a chef, it would be illegal. Tip sharing or pooling in California must include only customer-facing employees who contribute directly to service.

8. Common Questions: Can Salaried Managers Collect Tips?

  • Answer: Generally, no. Both federal and California law prevent salaried managers and supervisors from collecting tips from a tip pool.
  • Explanation: This restriction exists to ensure that tips go to employees who directly provide services to customers, rather than those in management or supervisory roles.
  • Example: In a California restaurant, if the manager assists in serving tables, they cannot participate in the tip pool, as California law bars management from receiving tips collected for distribution among employees.
  • Example of When Tip Pooling is Illegal: In a California bar, if the manager occasionally serves customers and collects a share of the tip pool, it would be illegal. California law explicitly prohibits managers from taking a share of pooled tips, even if they sometimes perform customer-facing duties.

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