Who’s in the Pool?
There’s a lot of discussion about tipping – who should be tipped, how much they should be tipped, how tipping should affect the minimum wage, and whether tipping should be abolished entirely, just to name a few of the topic’s hotly debated questions. A related tangent, the concept of tip pools, is even being weighed in courtrooms across the country, possibly soon including the U.S. Supreme Court.
Learn the Lingo
Before we dive too deep into the tip pool, it’s helpful to know the following terms in order to understand the discussion.
Tip: Any money left by a customer specifically for staff members with whom he or she directly interacted. While tips are most often associated with waiters, other staff members that may be tipped are wine stewards, bartenders, busboys, casino dealers, and delivery drivers. These are considered “customarily and regularly” tipped employees by law.
Mandatory Service Charge: Often added onto the bills of large parties or catered events, service charges are not considered tips in most states, though in many cases customers misunderstand this and do not leave a tip in addition to the service charge. Anything designated as a service charge on a receipt can simply be kept by the employer, with no mandate to distribute all or even part of the funds amongst the staff. However, some states mandate that service charges be treated like a tip unless the customer is informed that the charge does not go to the servers, and there may be other legal gray areas to consider.
Tipped Minimum Wage: In most states, employers can pay tipped employees a significantly lower minimum wage than other employees. Federal law mandates a tipped minimum wage of $2.13 per hour, but that does vary some by state. Some states have done away with the tipped minimum wage completely, requiring employers to pay servers the same as non-tipped employees.
Tip Credit: The tip credit federal law allows employers to pay less than the tipped minimum wage in place of the standard minimum wage as long as an employee’s tips bring her up to the standard minimum wage. Essentially, employers are receiving “credit” for paying their employees even though the money is coming from a tip. It is important to note that despite tip credit benefitting employers, all tips belong to the employee who received them. Tips at no time belong to the employer or can be confiscated by them, except to distribute into a valid tip pool.
Tip Pool: A tip pool is created when an employer takes a portion of the tips received by a tipped worker and distributes it to other workers. There are many sometimes confusing rules surrounding tip pools, hence the controversies and escalating court battles.
Tip pooling is a tricky subject. Used in the wrong circumstances, it can make high-performing servers resentful of those they see as taking their earnings. However, in some cases it can promote a feeling of unity and teamwork amongst the staff, and encourage servers, bartenders, and busboys to work together to make sure every customer is taken care of and all the side work is completed. This can also help mitigate some of the squabbling that can occur between servers over table assignments. If you decide to try a tip pool, there are some rules that must be followed.
- No tip money that an employer is counting toward tip credit can go into a tip pool. Any money taken from an employee’s tips to go into the tip pool cannot be counted toward that employee’s minimum wage. However, money given to an employee from the tip pool can count toward that employee’s wages.
- Employees must be informed up front that their tips will be going into a tip pool.
- Back-of-house employees – such as cooks, chefs, dishwashers, and janitors – cannot be included in the tip pool. In some states, management is also excluded from the tip pool. The tip pool is only to be used for tipped employees.
Beyond that, there’s a lot of leeway: tips can be divided equally, based on hours worked, or scaled for seniority. However, despite the rules seeming pretty straightforward, they are the focus of two high-profile court cases happening now.
Tipping the Court
In one of those cases, a server from Oregon is suing her employer, who pooled tips and distributed them between the front and back of house. According to the server, between 55 and 70 percent of the tips went to the back of house, while the rest was distributed amongst the servers according to how many hours they had worked. However, Oregon is not a tip-credit state, so the server was being paid at least minimum wage just like the back of house, which the defendant claimed made the tip pool valid. Perhaps more importantly, the defendant also made the claim that the Department of Labor, which put forth all of these rules to begin with, doesn’t have the authority to make the rules.
The regulations all stem from the Fair Labor Standards Act (FLSA), which was originally adopted in 1938. As you might expect, the ever-changing economy, working conditions, and social norms have necessitated quite a few updates to the FLSA. These changes are determined by the U.S. Department of Labor (DOL), and resulted in amendments to the FLSA in 1974, 1977, 1996, 2000, 2007, and 2011. The second lawsuit happening now pertains to those amendments, which include the tip pooling regulations and whether they’re valid.
The National Restaurant Association (NRA) is currently petitioning the Supreme Court to hear their case against the DOL, which basically claims that Congress did not give the department the authority to regulate tip pooling. Specifically, the NRA wants restaurant owners to be able to include the back-of-house staff in the tip pool, using the argument that Congress’s silence on the issue means lawmakers never intended for the DOL to pass the regulations that prohibit it.
“To express its intention that certain activities be left free from regulation, Congress need not lace the United States Code with the phrase, ‘You shall not pass!'” –NRA Petition for a Writ of Certiorari
Pushing for a Bigger Pool
Supporters of including the back-of-house staff point out that because the prices of menu items rise with inflation, so too has the tip since it is typically calculated as a percentage of the total bill. This has led to tipped employees making about 300 percent more than they were 30 years ago, while back-of-house employees have only seen a 20 percent increase. Some claim that including back-of-house workers in the tip pool could help close that gap.
However, critics argue expanding the tip pool will allow employers to decrease their base pay to the tipped minimum wage, essentially using their servers’ tips to pay back-of-house wages. This is especially timely now, with the Fight for $15 movement, which advocates for a $15 federal minimum wage, gaining ground across the country. Employers looking to avoid paying staff an increased minimum wage could use an expanded tip pool as a way around that.
For now, employers should stick to the FLSA as it is written, which means only tipped employees can be included in a tip pool, if you choose to implement one. However, with two large cases challenging these regulations, employers and employees alike would do well to stay abreast of any changes as they happen.
This is part of an ongoing series about restaurant wages. The second part of this series discusses eliminating tips.