Restaurant Tip Pooling Laws & How to Manage

Tip pooling is a common practice in restaurants where all tips from customers are collected to form a “pool” and then divided among employees at the end of the shift. Managers have control of how this operates in their establishment, but some states have differentiating tip pooling laws. In this article, we cover how it works and the most common laws.

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What is Restaurant Tip Pooling

Managers of restaurants can choose to collect all tips from paying customers to make a tip pool and redistribute it among employees. Each restaurant tends to have its own procedures. Some choose to divide the tip pool among only customer-facing roles like waiters and bartenders, while some choose to share with all hourly workers in the restaurant.

Tip pooling can improve team relations by encouraging everyone to work harder to increase the tip pool and result in more tips for everyone. This team effort can create a pleasant work environment where everyone helps each other. On the other hand, tip pooling can also cause problems between team members. If some servers slack off in hopes of another server completing their tasks, there might be tension caused by evenly splitting tips.

How Tipped Employees are Paid

Tipped employees are paid through a combination of a minimum “cash wage” paid by the employer plus an additional allowance for tips from customers to meet the overall minimum wage requirement for food service workers. The federal minimum wage is $7.25/hour but states have additional minimum wage laws. 

U.S. federal law requires tipped employees to be paid at least $2.13 per hour directly from the employer in order to meet the minimum wage with tips. If the total hourly wage is short of the requirement after tips, the employer must pay the difference. 

Tip Credit Towards the Minimum Wage

There is also a maximum tip credit allowed toward the minimum hourly wage for tipped employees. Each state has specific definitions to be considered a tipped employee. Your state either follows federal guidelines, does not allow a minimum cash wage, or sets its own minimum cash wage above the federal distinction.

Tip Pooling Laws by State

Tip Pooling Laws

Regardless of state, federal law prohibits tip pools including restaurant owners and managers. Higher up staff can not take tips from employees. Before 2018, tip pools could not include untipped staff either, but legislation has since changed. 

Across the country, back-of-house employees can now receive compensation for their work through tips, regardless of whether they are in customer-facing roles or not. To make it even more confusing, states have varying tip pooling laws so you’ll need to research the rules in your own state.

Tip Pooling Laws in New York

New York state’s tip pooling laws only allow employees whose main duty is a customer-facing role to participate in tip pools. This refers to mainly front-of-house workers like servers, bartenders, bussers, hosts, and similar jobs. In fact, only 45% of restaurants share tips with kitchen staff.

In New York State the combined minimum wage is higher than the federally mandated minimum wage and it continues to rise. This has prompted restaurant owners to cut staff, raise menu prices, and reduce operating hours.

Tip Pooling Laws in Texas

Texas tip pooling laws are similar to that of the federal government, but a worker is considered a tipped employee if they make $20/month in tips which are lower than the federal standard of $30/hour. Texas tip pooling laws state that tipped employees are not required to share tips with untipped employees including cooks and dishwashers. If they choose to tip share, it may not be claimed as a tip credit by employers.

Tip Pooling Laws in California

As shown in the table above, restaurant employers cannot claim a tip credit to subsidize their employees’ wages. Depending on the size of the establishment, employers must pay $13 or $14 per hour through payroll. The California Department of Labor Standards Enforcement has specific guidelines to who can participate in a tip pool and how to distribute it in a “fair and reasonable” manner.

• Who can participate: “Chain of service” workers. This includes front-of-house workers like servers, bussers, and bartenders.
• How to redistribute: 80% To servers, 15% to bussers, 5% to bartenders.

Ways to Distribute Tip Pool Among Restaurant Workers

Distributing the tip pool is a matter of trial and error. Each restaurant’s dynamic is different, therefore some methods may work and others may not. Read below for a few ideas to try with your team, but make sure that you choose something that won’t hurt morale and will motivate your employees to best serve your customers. 

Based on Number of Hours Worked

Each worker should get a share of the tips proportionate to the amount of time they worked. This can be frustrating for the workers who consistently outperform their coworkers but helps everyone remain on an even playing field. Sometimes it is the customer who undertips and is not a reflection of the service, so hopefully, it evens out in the end.

Predetermine Percentages for Each Type of Staff

Typically servers get the majority of their tips earned, but restaurant managers can help foster a more collaborative team by having servers “tip out” the other workers of the restaurant. Tipping out, also known as tip sharing, means the waitstaff gives a percentage of their tips to the other team members. This can be done after pooling all tips, or from each server individually. A common breakdown is:

• 80% to servers
• 10% to kitchen staff
• 5% to hosts/hostesses
• 5% to dishwashers

Jenna Slatowski, manager at Uptown Swinery in Saint Augustine, Florida, shares: “The only tip-sharing we do is for the bartenders and bussers. The bartenders get a percentage of the beer, wine, and liquor sales from the servers, and our bussers get 5% of food and non-alcoholic beverage sales from the servers each shift. Other than the small percent going to them, the servers receive all of their tips.” 

Additionally, managers can experiment with the tipping out structure, whether it be the responsibility of the servers themselves, or done through the closing out process. Slatowski adds, “We just did a trial run of doing cash payouts so at the end of their shifts they would get all their tips in cash and they were responsible for tipping out bartenders and bussers but we opted out of that.” Some methods require more work and maintenance while others involve less supervision.

How to Deal With Employees Who Don’t Want to Pool Tips

The qualm most servers have with tip pooling is it benefits those who may not work as hard. If someone does extra side work and picks up the slack of others, they will make the same amount in a tip pool which is not always considered fair. If an employee is very personable while another is in a bad mood, they will likely not make the same amount, yet have to split it evenly in the end. 

For those that work in the industry, tip pooling can be seen as a participation trophy- “a reward for people who shouldn’t even be on the field” explains restaurant owner Thomas Grubb, “you have maybe one rockstar on a shift and a few other doing the bare minimum but feel entitled to the same benefits.”

On this topic, Grubb suggests, “The concept (of tip pooling) really works when you have a group that has ties to each other. Their normal human nature is to help their friends. But when you have a group with no other connection outside of work, the chances of success decrease. Today it's hard to get staff to act as a team. We are divided in so many ways, so the pool tipping system isn't as effective as it used to be.” Managers need to get creative in order to make tip pooling work seamlessly.

Create Performance Goals

A fun way to engage your employees and form a restaurant team is through goal-setting. One way to set this up is by creating different goals for front of house and back of house employees. Those who win the contest or reach the determined benchmark get an extra bonus. Some ideas to increase sales and transform your workplace environment include:

• Who can sell the most: Choose an item and track item sales on your POS system to see which server sells the most of that specific dish. Reward that server with a larger percentage of the tip pool from that shift.
• Make upselling a game: At the start of the shift, pick a few items to include in the contest. If someone orders biscuits and gravy for breakfast, the server can offer the option to add fried chicken or eggs on top. Whoever can upsell the breakfast platter the most gets a bonus.
• Employee of the month: We all know how this works generally, but it is even more important in a restaurant to recognize back-of-house staff. Oftentimes their hard work can go unnoticed behind the walls of the kitchen and away from patrons. Offer a gift card or higher percentage of the tip pool to an outstanding employee for a shift or two.

Offer Other Incentives

An additional way to help encourage your workers to be team players is to offer other benefits to the job unrelated to tips. Alleviating stress in other aspects of their lives can help shift the focus away from tip pooling policies. 

• Schedule flexibility: One option is to allow your workers to determine their preferred schedule. Instead of expecting complete flexibility, work with your employees to compromise on a schedule that works for as many people as possible. This way, parents can be around more for their kids and those that are in school can designate time for their studies without being called in last minute to cover a shift.
• Shift drinks: Instead of providing only one staff meal per shift, shift drinks can be a pleasant end to an otherwise stressful day at the restaurant. After hours can also be a great time for team bonding which can, in turn, improve the atmosphere at your restaurant overall.
• Health coverage: There are plenty of options for health coverage for small business owners. Since most restaurants do not provide health coverage, many restaurant workers have to sacrifice their health for their job. Although there are a few options for employees, you can help relieve this stressor for your employees today by considering a low-cost plan to help them access the health services they need.

Tip Pooling Frequently Asked Questions (FAQs)

Tip pooling laws have many caveats, so it is important to stay up-to-date with new regulations in your state. Below we answer some of the most popular questions related to tip pooling to help you navigate the complexities.

What is a tip credit?

Instead of a restaurant paying tipped employees minimum wage, they can pay a reduced wage as long as the difference between that and the legal minimum wage is made up through tips. The tip credit is considered paid through tips and therefore employers can claim it as part of the minimum wage. According to federal law, the maximum tip credit is $5.12, but many states choose to raise this amount in places where the minimum wage is higher.

Who is considered a tipped employee?

States have different definitions of a tipped employee, but a tipped employee is usually someone who works in the hospitality industry and makes more than $30/month in tips. Since March 2018, even employees who are not technically considered tipped employees can participate in the tip pool. Managers and supervisors are never allowed to participate in the tip pool.

Where can I find my state’s minimum wage laws?

It is extremely important to ensure your restaurant’s policies are compliant with federal and state regulations regarding tipped employees. On the U.S Department of Labor website, you can find the combined minimum wage, minimum cash wage requirements, and maximum tax credit laws for each state. They also clarify the definition of a tipped employee for each state jurisdiction.

Bottom Line

Tip pooling can be a controversial topic among the restaurant staff. Tip pooling practices can cause tension between workers and lead to high staff turnover rates. In 2019, restaurant turnover rates were higher than that of any industry.

Thankfully, there are ways to make up for this potential disadvantage. By offering health coverage to your employees, you can show you care about their wellbeing for only $45 per month per employee. Learn more.