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Do You Have Questions About Tip Pooling?

Wednesday, April 13, 2016  
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Tip Pooling

It's common for restaurants to require tipped employees to contribute a portion of their tips into a pool which is then split among other employees. This is perfectly valid under the federal Fair Labor Standards Act's tip-credit provisions, but only if you follow certain limitations such as how much is contributed and who all will share in the pool. That's the issue facing The Grotto in Houston, where several disgruntled ex-waiters have filed a federal lawsuit claiming back pay under an improper tip pool arrangement. Beltran, et. al. v. Landry's Restaurants, Inc d/b/a/ The Grotto.

Fact Sheet #15: Tipped Employees Under the Fair Labor Standards Act (FLSA)

How Much Money Can Be Put In?

In the first place, tipped employees cannot be required to contribute more of their tips to a pool than is "customary and reasonable" in the locality in which they work. As an enforcement position, the U.S. Wage and Hour Division will not challenge pool contributions equal to 15% or less of an employee's tips. If the proportion is greater than 15%, then you might well be called upon to show (if you can) that the higher amount is in fact customary and reasonable in your particular community. This problem can sometimes happen where, for example, an employer requires a contribution based on a percentage of an employee's sales instead of using a percentage of his or her tips.

Also, only the tip amount in excess of the tips used for the tip credit may be taken for a pool. As an illustration, if you are taking the maximum tip credit of $3.02 per hour (based on the current minimum wage of $5.15), a tipped employee who receives only exactly enough in tips to cover that credit cannot be required to contribute to the tip pool. If employees are nevertheless made to contribute to the tip pool, then they have not been paid the required minimum wage.

Who Can Swim In This Pool?

Another limitation is that tipped employees cannot be required to share their tips with workers who do not customarily and regularly receive tips. The U.S. Wage and Hour Division has said that wait-staff, bellhops, counter personnel who serve customers, bus employees, and service bartenders are among the kinds of employees who are permissible pool participants. But the Division has also taken the position that dishwashers, cooks, janitors, and laundry-room attendants are not the kinds of employees who can be permitted to participate in tip-pooling arrangements.

In the Landry's case, the waiters allege that they were required to contribute $3.50 of their tips to the person in the kitchen who cut and prepared the dessert pastries, and another $3.50 to the person in the kitchen who prepared coffee. Since these are not employees who have any interaction with patrons, and do not "customarily and regularly" receive tips, the waiters are claiming a "clear violation of the FLSA." Even close cases are usually construed in favor of employees, and adversely to restaurants. For example, a similar case in the U.S. Court of Appeals for the Sixth Circuit (covering the states of Kentucky, Michigan, Ohio, and Tennessee) ruled that a tip pool should not have included waiters and waitresses whose work had been limited to salad preparation and related tasks. These employees had no personal contact with patrons and instead worked outside of their view, and the employees' duties were, as the court put it, restricted to things "traditionally classified as food preparation or kitchen support work...." Therefore, the court said, the tip pool was invalid, and the employees who had been required to contribute tips to it were due enough in back wages to bring them up to the full minimum wage for all their hours worked.

Sometimes tipped employees decide on their own to share their tips with co-workers who are not tipped employees and who do not participate in a tip pool. Or, tipped employees might voluntarily decide to share a larger proportion of their tips than their employer could require them to contribute to a tip pool. If they do this freely, not under any formal arrangement, and independently of and without any pressure or coercion from their employer, then this does not invalidate the tip credit or a tip pool. However, you cannot use any of those pooled tips to cover any tip credit.

Adding It All Up

While the amounts in questions might sound small at first, they add up quickly. The financial exposure presented by allowing ineligible employees to share in a tip pool can be serious indeed. In addition to reimbursing employees for lost wages and money improperly contributed to the pool, plaintiffs are entitled to an identical amount as "liquidated damages" plus costs and attorney's fees on top of that! Still not a huge amount if you're dealing with a single employee, but most of these cases, including the Landry's lawsuit, are brought as collective actions, meaning there is a whole class of plaintiffs which includes both past and present employees.


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