The Difference Between Tip Pooling and Tip Sharing
Many restaurant owners use the term tip pooling and tip sharing interchangeably. Confusing these two definitions can create significant financial liability for restaurants. The guiding law on tips stems from the Department of Labor and the Fair Standard Labor Act.
Tip Pooling Defined
Tip pooling is permitted by the FLSA as long as employees participate either voluntarily or only required to pool with fellow “tipped employees”. In order to determine if an employee is a “tipped employee”, they must pass the “customarily and regularly receives tips” test, discussed below in more detail.
The February 23, 2016 ruling from the Federal Ninth Circuit Court of Appeals reversed previous opinions (Oregon Restaurant & Lodging Assoc. v. Perez). This new ruling establishes that employers cannot implement policies requiring tipped employees to pool their tips with untipped employees. This ruling upholds a regulation issued by the federal Department of Labor (“DOL”) in 2011.
The Ninth Circuit Court, in overturning rulings by district courts in Nevada and Oregon, ruled that the Labor Department regulation was reasonable and consistent with Congress’s goal of ensuring that tips stayed with the employees who receive them.
Section 203(m) of the Fair Labor Standards Act (“FLSA”)
Section 203(m) permits the employer to complete its hourly minimum wage requirement to a tipped employee with the tips the employee earns from the customer. This is known as a “tip credit.” Employers can take tip credits under the following guidelines:
1. The employer notifies the employees of the practice
2. The employer allows tipped employees to keep all tips they receive or to participate in a valid “tip pool” whereby tips are combined and then distributed among the employees who are “customarily and regularly receive tips.”
What defines the customarily and regularly tipped criteria?
An employee is deemed to “customarily and regularly receive tips” if:
1. The employee has more than a de minimis interaction with the customer that leaves the tip AND
2. The employee is engaged in customer service functions.
The employees job title is irrelevant when applying the customarily and regularly tipped test. A great example of how this works:
A sushi chef at a teppanyaki restaurant who serves patrons directly from the grill may be a tipped employee. Whereas a chef who works in the kitchen and does not interact with patrons is not considered a tipped employee.
Tip Sharing Defined
The main difference between tip pooling and tip sharing is that tip sharing is 100% strictly voluntary. The Department of Labor permits mandatory tip pooling (again, only with fellow tipped employees) but it does not permit mandatory tip sharing. This is different because employees can voluntarily share their tips with back of the house employees, but cannot be mandated to share those tips because back of the house employees are not defined by the DOL as “tipped employees.”
To sum it all up….
- Tip Pooling – Employer can mandate tip pooling but must limit the tip pooling to only employees that are tipped employees, meeting the “customarily and regularly receive tips” test. Employees usually considered back of house employees are not tipped employees. Employers cannot mandate tip pooling with an employee that is not a tipped employee.
- Tip Sharing – Employers cannot mandate tips are shared with the back of the house employees. An employee can volunteer to share their tips with the back of the house but those allocations do not have to be distributed evenly. The employee sharing the tips can choose when and how much to share.
While this ruling came as a huge surprise to many in the industry, it is now the rule until if and when Oregon Restaurant gets reconsidered en banc or is appealed to the U.S. Supreme Court. Until then, this new ruling does not permit mandatory tip pooling with any employee who does not “customarily and regularly receive tips.” We encourage employers to review their tip policies with legal representative or trusted HR advisor.
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