No Good Deed Goes Unpunished: Traps In Mandatory Tip Pooling

Wage & Hour,
By Eric Magnus, Jackson Lewis, P.C.

Restaurants generally adopt mandatory tip pooling rules for innocuous and in some cases altruistic reasons: to share the distribution of tips with those who help generate them.  In many cases, that group of employees includes those that make more than $7.25/hour in direct wages (and therefore are not “tipped employees”) and even management and ownership.  

Earlier this year on March 23, 2018, President Trump signed H.R. 1625, the Consolidated Appropriations Act for 2018 which contains within it a change to the rules that apply for tip pooling.  However, if your restaurant requires “tipped employees” that make less than $7.25/hour in direct wages to contribute tips into a tip pool, this legislation does not change the applicable rules.  

Those longstanding rules are contained within the Fair Labor Standards Act (“FLSA”), 29 U.S.C. § 203(m).  If your restaurant claims the “tip credit” by paying a tipped employee less than $7.25/hour in direct wages, the restaurant cedes its right to retain any part of the employees’ tips received from customers. It is the “tradeoff” for being able to pay an employee less than minimum wage.  However, the restaurant can require the tipped employees to share their tips, but only with employees that “customarily and regularly receive tips.”  In other words, the restaurant can only require “tipped employees” to share their tips with other employees who are part of the customer service experience.  This does not include “back of the house” employees such as cooks or dishwashers.  This also does not include any managers or owners. The tip pool can include front-of-the-house employees to whom the restaurant pays a direct wage above $7.25/hour such as hosts or expediters.
If you want to have this kind of mandatory tip pool in your restaurant, make sure to take the following steps to keep the tip pool lawful:
   1)  Do not include any supervisors, managers, owners or “back of the house employees” in the tip pool.
   2)  Make sure 100% of the customers’ tips are taken home by the customer-facing employees.
   3)  Define a percentage of sales or a percentage of tips the Servers and/or Bartenders are required to contribute.  Make sure the results of          the tip pool are fair and equitable and accurately compensate employees for the role they play in generating the tips. 
   4)  The tip pool can never result in any tipped employees’ take home pay (including tips) resulting in less than minimum wage per hour.
   5)  Do not deduct charges incurred for credit card processing fees beyond the restaurant’s actual cost for such fees.
   6)  Make sure the tip pooling rules are included in the written notice the restaurant is required to provide to tipped employees of the way            they are paid.
   7)  Make sure that all earned tips, including tips earned through a tip pool, are recorded, tracked and retained for a period of three years.
   8)  Train the employees contributing and receiving the tips as to why the tip pool makes sense for everyone.
If your restaurant does not “claim the tip credit” for the positions contributing to a tip pool (i.e. Servers), then the 2018 legislation does affect the rules that apply to your tip pool.  Prior to the legislation, it was not clear whether any of the rules discussed above applied if the restaurant pays its Servers a direct wage of greater than $7.25/hour.  Now, it is unlawful for employers to permit tips to be shared with managers or supervisors regardless of whether the restaurant claims the tip credit or not.  Unlike tip credit employees, restaurants can require Servers that are paid a direct wage of greater than $7.25/hour to share their tips with “back of the house” employees such as cooks or dishwashers.  The legislation also makes clear that if a restaurant permits a tip pool that includes supervisors, managers or owners, the restaurant will owe the employees the full amount of the mandatory tip pool, double that amount for liquidated damages, and attorney’s fees.
If you have further questions regarding pay practices for tipped employees or tip pooling, or for advice on creating pay practices that comply with the law and avoid costly litigation, please contact Eric Magnus at Jackson Lewis, P.C.  He can be reached at 404-525-8200.