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Review Your Tips Processes Now or Pay Later, Part 2: Diving into the Tip Pool

In Part 1 of our 3-part series reviewing tipping rules under the Federal Fair Labor Standards Act (“FLSA”) and Depart of Labor’s (“DOL”) Tip Rule, we discussed when payments to employees constitute “tips,” when an employee is considered a “tipped employee,” and an employer’s related minimum wage obligations. In Part 2 of the series, we review the FLSA and DOL’s rules with respect to tip pooling and restrictions on an employer’s ability to require employees to share tips. As a common area for DOL investigators to identify violations of Federal wage and hour law, employers must remain cognizant of these tip-pooling rules and be careful to avoid inadvertently administering invalid tip pools – which may carry expensive consequences.

Tip Pooling

Tip pooling –a system where employees are required to “tip out” or share tips with other employees – is a common practice in the hospitality industry. The FLSA and DOL outline certain requirements of a valid tip pooling system and when employers may claim the tip credit for tipped employees involved in tip pooling. Employers who decide to use tip pooling must be cognizant of these requirements, including that employees must receive advanced notice of the tip pool arrangement.

Mandatory vs. Voluntary Tip Pooling

Whether a tip pool is mandatory or voluntary determines whether an employer may take the tip credit or allow participation of non-tipped employees. When a tip pool is mandatory, only tipped employees may participate. If any non-tipped employees participate in a mandatory tip pool, an employer is prohibited from taking the tip credit for any participating employees. In other words, an employer may only require tipped employees (for whom the employer is taking the tip credit) to share tips with other tipped employees. Please refer to series on when an employee qualifies as a “tipped employee.”

On the other hand, tipped employees (for whom the employer is taking the tip credit) may voluntarily share tips with non-tipped employees, so long as their decision to do so is made free of any coercion from the employer. Making sure all tip pools are being conducted and managed in full compliance with the FLSA and DOL Tip Rule is incredibly important. A tip pool that fails to satisfy the FLSA and DOL’s requirements is considered an invalid tip pool, which exposes the employer to a range of negative consequences for violating wage and hour law.

Mandatory Tip Pooling when Employer Takes the Tip Credit  Mandatory Tip Pooling when Employer Does Not Take the Tip Credit 

Voluntary Tip Pool

This type of tip pool must only include tipped employees. No back-of-house or other non-tipped employees may participate. This type of tip pool can include tipped and non-tipped employees. All employees must receive the regular hourly wage. This type of tip pool can include tipped and non-tipped employees. The tip credit may be taken for tipped employees. Participation must be truly voluntary and not the product of coercion or a condition of employment.

 

The DOL Sets a Low Bar for When a Tip Pool is Mandatory

Importantly, formally requiring participation in a tip pool is not necessary for the tip pool to be considered “mandatory.” Rather, courts and the DOL consider a range of facts deemed relevant to whether employees’ decisions to participate were made free of employer coercion. Specifically, courts have found the following facts indicative of a mandatory tip pool:

  1. whether the employer established a suggested or prescribed amount that employees contribute to the tip pool;
  2. whether the employer encourages or is aware of retaliation or lessened service from back-of-the-house staff towards a server who refuses to participate;
  3. whether the employer urges, suggests, recommends, or encourages employees to contribute to the tip pool;
  4. whether the employer disciplines or threatens to discipline an employee who does not contribute to the pool; or
  5. whether the employer expressly tells employees that participation in the pool is necessary.

We have also seen the DOL claim that an employer’s mere facilitation of a tip pool by providing forms for employee use is evidence of the mandatory nature of the tip pool!

Again, even if an employer does not formally require employees to participate (such as, through a written policy or under threat of discipline or termination), if circumstances support employees’ feeling as though they must participate, the DOL will likely consider a tip pool mandatory. For this reason, any employer involvement in even assisting employees in administering a tip pool presents a risk of the DOL determining the tip pool is mandatory, and therefore, invalid if it includes employees for whom the employer is taking the tip credit. An employer must therefore exercise extreme caution whenever employees engage in a voluntary tip pool – as any level of involvement may give rise to a DOL or employee claim that the tip pool is mandatory.

Finally, employers must remember that managers are considered extensions of the employer. Accordingly, employees cannot be required to share tips with managers as part of a tip pool. While managers may be required to contribute to a tip pool (i.e., tip-out other employees), managers may not receive tips from a tip pool. While many restaurants and other establishments’ managers wear multiple hats, any person in a supervisory role will likely be considered a “manager,” and thus ineligible to receive tips from a tip pool.

Consequences of an Invalidated Tip Pool

When tipped employees are required to participate in an invalid tip pool, employers may face the following consequences:

  • A fine up to $10,000 or imprisonment up to six (6) months, or both[1];
  • Lose the tip credit for the time where the employee was required to participate in the invalid tip pool;
  • Be required to pay employees back wages resulting from having paid them the hourly “tipped minimum wage” rather than the higher regular minimum hourly wage;
  • Be required to repay employees any tips taken and distributed pursuant to the invalid tip pool; and
  • Potentially face liquidated damages (doubling the amount of back wages owed!) and other civil penalties;

In addition, employers are also subject to consequences under Michigan law, which results in similar consequences as the federal penalties of fines or potential imprisonment.

Key Things to Remember:

  • Tipped employees (for whom the employer is taking the tip credit) must not be required or pressured to share tips with any non-tipped employees;
  • If an employer does not take the tip credit, employees (even tipped employees) may be required to share tips with any employees (either tipped or non-tipped);
  • While tipped employees (for whom the employer is taking the tip credit) may voluntarily choose to share tips with non-tipped employees, the DOL is extremely scrutinizing over when a tip pool is truly voluntary – any involvement from the employer in encouraging participation or assisting in administering a tip pool may lead the DOL to view the tip pool as

By Mitchell Zolton

This publication is intended for educational purposes only. This communication highlights specific areas of law and is not legal advice. The reader should consult an attorney to determine how the information applies to any specific situation.

[1] 29 USC §216(a)

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