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Tip pooling is the practice of tipped employees to contributing their tips into one collective pool shared and divided evenly among that group. Previously, there were only two legally acceptable options for tip pools. On April 30, 2021, the DOL opened the door a bit wider for a new variation!
Now that the DOL has added the new tip pool option, there are three and only three options for structuring your tip pool. No matter which you choose, you must give advanced notice to your tipped employees. Best practice: give advanced notice in writing and have your employees sign the notice!
- Mandatory Tip Pool (for those using the tip credit) – Who’s in and who’s out?
- No managers allowed!
- If you have a mandatory tip pool and the tip credit, the tip pool is for tipped employees only.
- No non-tipped employees allowed! That means no back-of-house or other non-tipped employees can participate in this kind of pool. (But check out your options below for including non-tipped employees).
- New: Mandatory Tip Pool (for those not using the tip credit)
- You can include tipped and non-tipped employees- including back-of-house and other non-tipped employees- if you do not use the tip credit.
- Still no managers!
- Voluntary Tip Pool – anyone except managers can participate.
- Full minimum wage is paid to nontipped employees in addition to their share of the tips.
- Participation must be truly voluntary.
If you do this incorrectly, you will:
- Invalidate your own tip pool
- Lose your tip credit
- Have to pay employees the difference in wages paid and minimum wage in addition
- Face other potential penalties
- Pay back wages to delivery drivers
The new tip pool option is effective April 30, 2021.
Pro Tips on Tips
- Tips always belong to the employee! You cannot take tips paid to tipped employees even if you’re not taking the tip credit. You can only withhold tips from tipped employees for two reasons:
- Payment of credit card charges when tips are given via a credit card or
- Redistribution under a valid tip pool.
- Be mindful of your tip pool structure and processes. The only options are mandatory and voluntary pools, and voluntary pools must be truly voluntary. Employers must provide notice to tipped employees if the employer uses a tip pool.
- Manager or supervisor participation in the tip pool is still not acceptable
- Requiring tipped employees to contribute to a mandatory tip pool with non-tipped employees when you take a tip credit is not acceptable. If you use the tip credit, only voluntary tip pools can include non-tipped employees
- Tips must be fully redistributed by the regular payday for the workweek or pay period in which tips were earned. All employees in the pool must be paid at least minimum wage.
- Under the DOL rule for the new mandatory tip pool, employers must maintain adequate records on the tips received by non-tipped employees, just like you do for your tipped employees. Like under the other tip pools, managers and supervisors cannot participate in the tip pool and employers must provide employees with notice of the tip pool.
These mistakes can be very expensive. Consequences can include invalidating your own tip pool, paying back wages, losing your tip credit, and other potential penalties.
A Note on Service Fees
Some businesses have a practice of adding a compulsory fee or charge to customers for service, often called a “service fee.” This usually looks like a restaurant requiring a payment of a 15% service charge on a table of a certain number of people. Tips are different than service charges because tips are a “gift or gratuity” the customer chooses to give in recognition of service, but is not required to give. A service fee is not a tip and employers have complete discretion in choosing how to use compulsory service fees. However, any part of a service fee paid to tipped employees cannot be considered as a tip when calculating your tip credit. A service fee can be counted towards your minimum wage or overtime requirements.
A service fee is also distinct from a credit card charge. When a tip is placed on a credit card, some credit card companies require the employer to pay a percentage of the sale. The tip is still the property of the employee, but you can use the tip to pay the credit card charge. The employee would then receive the tip minus the percentage of sales paid as a credit card charge.
Wages for tipped employees can be a complex area of law with serious consequences for errors. If your workplace needs assistance complying with these rules, our business and labor and employment teams are experienced in this area of law and happy to address any questions you may have.
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