Is Tip Pooling Legal? Understanding Pooling, Sharing, and Tipping Out

When you work in a restaurant, tips are usually the majority of your income. Server base direct wages tend to be lower (tipped minimum wage is federally mandated at $2.13 hourly, but is higher in some states depending on that state’s laws) because the wage takes tips into account. In restaurants, tip sharing or pooling can ensure that staff members are fairly compensated for their participation in the customer’s overall experience.

However, tip pooling and tip sharing are not always carried out correctly, and certain practices not only take pay away from lower-waged workers, they are illegal. You may be a victim of wage theft and not even know it. Not sure? Here’s our tip pooling, tip sharing, and tipping out breakdown along with examples for each.

What Is Tip Pooling?

The laws attached to tip pooling may be different now than when you were hired. Before March 2018, tip sharing was allowed to take place as long as employers paid their tipped workers the regular federal minimum wage ($7.25). The 2018 lawFAB 2018-3 reiterates that employers, managers and supervisors are never allowed to take employees’ tips except for a valid tip pool.

This tip sharing was titled “tip pooling” in the 2018 law—another reason to focus more on the practice in your workplace rather than what it’s called.

The biggest question to ask yourself is: after sharing or dividing my tips, am I making less than federal minimum wage ($7.25 hourly) including take-home tips? If the answer is yes, we can help. (It's important to note that minimum wage varies in different locations; check your state or city for their minimum wage laws.)

The definition of tip pooling is when the total amount of tips earned is divided among non-supervisory staff members. For example: waitresses at a restaurant may put together all their tips after a given shift and divide the total evenly.

A legal tip pool may require tips to be shared among:

• Servers
• Bartenders
• Bussers
• Counter personnel
• Lower level kitchen staff (dishwashers, cooks, etc.)

A tip pool must always be a prearranged agreement that all employees are aware of; usually it would be included in the employment contract or a notice given to the employee at the time they start employment. Some see it as unfair because coworkers who were perceived as less efficient or hardworking receive equal compensation to the more competent employees. However, tip pooling is legal and there’s no law requiring the amounts of tip pool distributions to be based on merit.

Under no circumstances may an employer require tipped employees to share their tips with a manager, supervisor or owner (or “the house”).  When management or ownership  participates in the tip pool, this is illegal and likely means that everyone who was required to pay into the illegal tip share is owed significant damages.  

What Is Tipping Out?

Tipping out, sometimes known as tip sharing, is a bit different than tip pooling. When tipping out, servers will give a certain percentage of their tip to other staff members. For example: a waiter may make $200 in tips for the night, then give 5 percent to the dishwasher, 10 percent to the chef, and so on. Staff who could receive a portion of a server’s tip through tip sharing include:

• Janitors
• Dishwashers
• Chefs
• Cooks
• Bakers

There’s no defined industry standard of tip out percentages, but generally servers can expect to tip out around 20-30 percent of their tip if their workplace mandates the practice. While some servers may find this unfair, there’s usually nothing illegal about tipping out, and just because your workplace has a tip sharing agreement doesn’t mean that it’s operating illegally. However, tip sharing should not make tipped employees’ take-home wage dip below minimum wage.  Again, if the tip sharing includes managers, supervisors, owners or the “house,” that is illegal and you can be entitled to additional wages.  

Tip Sharing v. Tip Pooling v. Tipping Out

Sometimes workers and employers will use “tip sharing,” “tipping out,” and “tip pooling” as interchangeable phrases, so the best way to determine the situation is by who the tips are going to. The only phrase used by the Department of Labor is “tip pooling” but what it’s called matters less than what’s actually happening in your workplace.

When Is Tip Sharing Or Tip Pooling Illegal?

Simply put, supervisors, managers, owners or "the house" should not be part of tip pooling or sharing. If they receive a percentage of the tip out or pulls a dollar bill out of the tip jar, it’s likely they’re breaking the law.

Other illegal actions include:

• Employer counting service charges as tips
• Employer withholding credit card tips past payday, typically as they wait for reimbursement
• Employer enforcing deductions (for walk-outs, etc.) that bring worker’s wage below minimum
• Employer taking a larger tip credit for OT wage hours
• Withholding of “minimum wage makeup”
• Not being compensated for overtime work

At Morgan & Morgan, our attorneys have decades of experience handling wage theft claims and are offering free consultations to those who may be affected by wage theft. Do not hesitate to contact us today for a free, no-obligation case review.