How to Avoid an Expensive Tip Pooling Mistake

Sharing tips is a common practice in the restaurant industry. However, it’s a practice that regulators are trying to stop. The Labor Department said that in fiscal year 2021, the wage and hour division identified nearly $35 million in back wages owed to food service industry workers.

What are the top 3 food service industry violations?

The federal agency said its food service investigations often find violations related to:

• Employers keeping tips
• Failure to pay overtime
• Failure to pay for pre- and post-shift work

Employer-retained tips

Several recent enforcement actions by federal regulators show that the DOL is serious about going after businesses that improperly handle tips.

Wage and hour investigators found that a Dallas-area chain BBQ restaurant chain violated the Fair Labor Standards Act (FLSA). They did that by allowing managers to participate in the tip pool. The 5-restaurant chain was ordered to pay almost $900,000 in back wages.

The Labor Department said the employer failed to pay tipped employees all of their tips. It also said that hourly managers weren’t paid the correct rate of time-and-a-half for all hours worked over 40 in a work week.

In a similar instance, another Texas-based operator of several barbecue restaurants in several cities, including Austin, paid $230K to reimburse 274 employees after DOL investigators found that workers were required to share tips with managers.

A Massachusetts Mexican food restaurant also improperly included managers in its tip pool, according to the Labor Department. The eatery had to pay $61,788 in tips and damages to compensate the workers and remedy the FLSA violation.

A misunderstanding of the FLSA

Employers, managers, and supervisors are not allowed to keep worker tips under the FLSA. That’s the case regardless of whether or not the employer claims a tip credit, the DOL said in the statement announcing the settlement.

The Chief Operating Officer (COO) for the Dallas-area restaurant told a local news outlet that the situation was the result of a misunderstanding of the federal law.

The executive said the restaurant took several steps to move into compliance after the Labor Department audit. He said the tip pool was adjusted to include only non-manager hourly employees. He also said that pay for managers was raised to offset the funds lost by no longer being a member of the tip pool.

What are the requirements of tip pooling?

While wait staff often receive tips, those who work in the kitchen do not. Tip sharing and tip pooling are aimed at equalizing income levels for restaurant workers.

Federal law allows employers to set up mandatory tip pools or tip-sharing arrangements among employees. However, there are 2 requirements:

• Employers cannot keep any part of the tips.
• Supervisors and managers cannot be included in the tip pool.

These requirements apply regardless of whether employer takes a tip credit or pays employees the full minimum wage.

In addition, while managers and supervisors are allowed to contribute tips to a pool, they must not keep any portion of a worker’s gratuities or share in a tip pool with non-managerial workers.

While managers and supervisors are allowed to contribute tips to a pool, they must not keep any portion of a worker’s gratuities or share in a tip pool with non-managerial workers.

However, while managers and supervisors can’t participate in a tip pool, they can keep tips under certain circumstances. The Labor Department clarified in November 2021 that an employer is not in violation of the FLSA when a manager or supervisor keeps tips that “he or she received directly from customers based on the service that he or she directly and solely provides.”

What are the requirements on tip credit?

The FLSA requires that employers pay employees at least $7.25 an hour. However, the FLSA allows an employer to take a “tip credit” against the federal minimum wage for employees.

These employees may include servers and bartenders, who traditionally receive customer gratuities. In those instances, the employer only has to pay workers $2.13 an hour. The employer can use the tip credit to make up the balance of the federal wage requirement.

Follow the ‘80/20’ rule of limitation on tip credit

Employers that take advantage of the tip credit rule must also follow the 80/20 rule.

The 80/20 rule is a limitation on the tip credit that allows employers to take the tip credit for employees if the workers spend no more than 20 percent of their time on nontipped duties.

The tip credit can only be taken for the hours when an employee is doing work that produces tips or is performing tasks that directly support tip producing work.

The latest version of the 80/20 rule has been challenged in court. The National Restaurant Association and the Texas Restaurant Association filed a lawsuit in Texas federal court in December 2021. The organizations argued that the Labor Department overstepped its authority.

In May 2022, several business associations, including the National Federation of Independent Business, the National Retail Federation, and the American Hotel and Lodging Association, filed a “friend of the court” brief supporting the lawsuit. The associations said complying with rule would create hardship because of a lack of clarity.

Many states have their own specific tip rules

Many states have their own tip rules, some of which are stricter than those found in the FLSA. The FLSA sets wage and hour law minimum requirements, allowing states the latitude to enact stronger requirements.

Some states have banned the tip credit. They require that employers pay workers who are receive tips the minimum wage required under state law. Some states mandate that employers pay tipped employees a higher minimum wage than is required under federal law.

Additionally, some states allow employers to take advantage of a tip credit, but the state credit is smaller than the credit allowed under federal law.

Tip rule enforcement has undergone several changes

Enforcement of tip rules have undergone several changes in the past year.

In late 2021, the Labor Department announced a final rule on employer penalties. That rule restored its ability to assess fines against employers who take employees’ tips.

It also increased the penalties for employers who keep tips. Additionally, it expanded the range of circumstances under which civil money penalties could be assessed.

The move meant the Labor Department was scrapping a Trump-era standard that limited the federal agency to assessing financial penalties only for accidental and first-time violations.

In the same ruling expanding employer penalties for tips, the agency also clarified the situations under which managers and supervisors can keep tips.

In December 2021, the restored 80/20 rule went into effect. The current 80/20 law is the restoration of the Obama-era standard. That standard had been scrapped under the Trump Administration because of concerns that it was confusing.

Under the Trump regulation, employers could pay the tipped minimum wage for non-tipped tasks performed at the same time as the workers’ primary tipped duties, regardless of how much time was spent doing the tasks.

The Trump Administration overturned the Obama standard in December 2020. Under the Trump regulation, employers could pay the tipped minimum wage for non-tipped tasks performed at the same time as the workers’ primary tipped duties, regardless of how much time was spent doing the tasks.

Legal experts say the Labor Department is continuing its focus on this area in 2022.

Keep state and federal laws top of mind with tip pools

Employers must keep state and federal laws top of mind when constructing tip pools. Certainly, under federal law and most state laws, business owners, managers, and supervisors are not allowed to participate in tip sharing.

As a result, employers with tip pools should review their arrangements. It’s essential to make sure their businesses are in compliance with the latest legal mandates.