Tag: tipping

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Should You Implement Tip Pooling? Pros, Cons, and Best Practices for Restaurants

Summary

  • 77% of diners say that quality of service influences how much they tip, which begs the question: should tips be pooled and distributed to the whole team? 
  • Tip pooling is an arrangement wherein tips earned are pooled together and redistributed among all eligible restaurant workers. 
  • Payroll software simplifies tip and wage calculations, helping employers stay organized and compliant 

Tipping in restaurants isn’t just about the food; it’s about the entire dining experience—and it relies on teamwork. Serving food is as important as cooking dishes, cleaning plates, and resetting tables. While a study shows that 77% of diners say the quality of service influences how much they tip, it’s worth considering: should tips be shared beyond servers and also among the broader team of restaurant employees that contributes behind the scenes? After all, a good experience is a collective effort involving both front-of-house (FOH) and back-of-house (BOH) staff. This is where tip pooling comes in.

Tip pooling in restaurants defined

Everyone is familiar with the traditional tipping model: diners pay a voluntary but socially expected tip of at least 15% for good service. This is usually a cash tip directly handed to their server and kept by that server. Tip pooling is a formal arrangement that allows the restaurant to collect all gratuities and then redistribute the total amount of tips between workers.

Tip pooling is based on the idea that a gratuity is given for the overall dining experience, not just how quickly and politely the food was served. This means kitchen staff, bartenders, bussers, and front-of-house hosts all share in the reward.

The way the mandatory tip pool is handled can vary from restaurant to restaurant. There is no legally mandated method of working out how tips are pooled. Common ways of working out the tip split include:

  • Percentage-based pooling – Tips are pooled and redistributed according to pre-established percentages.
  • Role-based allocation – Tips are split based on roles, e.g., 60% to servers, 20% to bussers, and 20% to bartenders. 
  • Hour-based distribution – This method is based on the number of hours an employee worked in a shift. The employee will get tips that are proportional to the hours they worked. 
  • Shift-based pooling – Tip pools are created on a per shift basis, and only employees who worked a particular shift are eligible to get tips from the pool. 
  • Team-based pooling – Tips are distributed among teams. For instance, FOH workers get 70% of the pool, while BOH staff receive 30%.
  • Points system – Staff earn points based on their roles, experience, or contribution. At the end of the shift, points are totaled, and each point is assigned a dollar value calculated from the total tips earned.
  • Equal distribution – The most straightforward method wherein all tips are pooled and divided equally among all eligible staff. For instance, a pool of $1,000 is equally split among 10 employees. Therefore, each one takes $100 each.  
  • Combination or hybrid method – It’s the employer’s prerogative how to structure a tip pooling system. Therefore, the option to use a method or two from usual structures may be needed to address specific concerns.

What you need to know about tip pooling laws

Given how central tipping is to the service industry economy, it’s no wonder it’s been a legislative battleground. Federal law governing tips has undergone several significant changes over the years, including who’s entitled to keep their tips, who’s eligible for tip pooling, determining tip-facing occupations, recordkeeping rules for employers, and how tip credits can come into play. 

But after all of the rigorous changes, from new rules being enacted to some being repealed, here are the fundamental principles of federal tip laws:

Tips are exclusive to employees

The US Department of Labor strictly prohibits employers, including managers and supervisors, from keeping any portion of employees’ tips, whether the tips are received directly or via a tip pool. They are explicitly not allowed to demand, request, or coerce staff members to surrender their tips outside a legally compliant tip pooling or distribution system. 

Tip pooling

Employers can establish a system to manage gratuities and require employees to pool tips. However, managers and supervisors are not eligible for tips from these pools. It could include, however, non-tipped employees such as kitchen staff as long as the employer doesn’t take a tip credit and pays employees the full minimum wage. 

Tip credit

Employers can pay employees less than the federal minimum wage through a tip credit. For instance, employers can pay as little as $2.13 per hour if tips bring the employee’s total earnings to at least the federal minimum wage. 

If an employee performs dual roles, the employer can only take a tip credit on the job that has tipped tasks such as serving customers. For instance, an employee is working as a server and a janitor. In this case, the employer can’t use a tip credit for the hours the employee performs janitorial work because that’s not a tipped job. 

Service charges

Unlike tips, service charges are mandatory fees added to a client’s bill and are considered as property of the employer. Should restaurant owners choose to allocate a portion of the service charges to employees, those amounts would be classified as wages, and not tips. However, employers can use those amounts to meet federal minimum wage requirements under the FLSA.

Some states impose additional rules around service charges. For instance, in New York, restaurant owners must explicitly disclose how service charges are allocated in contracts, invoices, or menus. If a portion of the service charge will be shared with employees, the allocation must also be disclosed.

The main thing to remember is that unless a formal tip pooling system is in place, tips belong to employees, not the restaurant. While restaurants are allowed to bring in a tip pooling system, best practice says it should be done with the employees’ agreement and clearly explained in their contracts.As always, with any labor legislation, there may be local or state laws relating to gratuities. For instance, California doesn’t allow employers to take tip credits. Be sure to check your exposure or seek legal advice in this area before proceeding with any decisions regarding the income of tipped employees.

The pros of tip pooling

The main benefit of tip pooling is that it addresses the imbalance between front-of-house servers and other staff by pooling gratuities and disbursing them to all staff. Although well established, traditional tipping is an erratic way of being paid. Tips can also be vulnerable to discrimination since they rely entirely on social expectations rather than legislation. This means that even for serving staff who benefit from tips, the amount earned can vary wildly depending on myriad factors.

Tips can also create an “us and them” situation between front-of-house (FOH) and back-of-house (BOH) staff. Most restaurants experience this friction, where cooks and bussers are out-earned by servers simply because one group earns tips and the other doesn’t. Hiring kitchen and other backroom staff is easier when they’re not at a disadvantage compared to tipped front-of-house workers.In theory, tip pooling can strengthen teamwork by encouraging a greater focus on the overall dining experience.

The cons of tip pooling

Anything that impacts how much money staff takes home each shift is bound to cause friction, and tip pooling is no exception. As you’d expect for a system that takes money from one group and hands some of it to others, it’s divisive. Implementing such a system can introduce negativity into the workplace if handled poorly.

While some locations have found a workable tip pooling model, with buy-in from all staff, there is a strong chance that it simply takes a small pool of money and spreads it more thinly. Research has shown that although diners expect and prefer their server to keep all of their tips, a tip pooling system doesn’t change the amount people tip.

Tipped employees mostly rely on their tips more than their contracted salary to make ends meet. This means anything that cuts into that income can have an immediate impact on their quality of life and, by extension, their engagement at work. Introduce a tip pooling system to an existing restaurant, and your best front-of-house staff, the ones used to earning the most in tips, may well leave for a restaurant that uses traditional tipping to maintain their income level.

Tips for implementing an effective restaurant tip pooling system

Implementing a tip pooling arrangement is a balancing act. When done right, it can foster teamwork and fairness. However, if mismanaged, it risks impacting employee retention and morale. If you believe every team member contributing to the guest experience deserves a a part of the tip, getting it right from the start is crucial. Here are some practical tips for building a tip pooling system: 

Create clear and fair policies. 

While there’s no specific FLSA-mandated structure to building a tip pooling system, creating a system that works for your team is essential. Employers must develop a policy that is fair to all employees. Start by assessing your operations and determining the best distribution method. Should tips be allocated based on roles, hours worked, or shifts? Outline clear factors for determining allocations to ensure everyone understands and agrees on the system’s fairness.

Monitor, evaluate, and adjust.

Like any company policy, your tip pooling rules should not be set in stone. Since they directly affect employees’ wages, reviewing them regularly is crucial.  Is the system meeting your team’s needs? Are there gaps in fairness or clarity? Gather feedback and make adjustments as needed to enhance employee reception or ensure compliance with legal updates.

Understand the legal framework.

While you have the flexibility to structure your tip pooling policy, it must comply with federal and state laws. It is essential to understand the Fair Labor Standards Act (FLSA) and any applicable local regulations regarding tip pooling and wage distribution. Maintaining compliance ensures that your system is both fair and lawful, helping you avoid costly penalties.

Communicate with your employees.

Transparency is vital to successful implementation. Explain the policy to your employees during onboarding and provide them with accessible resources for reference, such as an employee handbook. Managers should also be prepared to address questions or concerns along the way. 

Use technology to stay on top of tip pooling calculations

Managing a restaurant involves many complexities, and handling payroll for various staff and teams is challenging on its own. Adding tip pooling to the equation can make it even more demanding.

The good news is that technology can simplify the process, ensuring that eligible employees receive the tips they rightfully earn.

Workforce.com is a system that can do that and more. Here are some of the ways it can help you manage tip pooling and wages.

  • Classifying employees – Workforce.com automatically knows who’s entitled to what. Whether your tip pooling system is based on roles, shifts, or hours worked, it can make accurate and automated calculations based on an employee’s qualifications. This can be easily set as early as onboarding and updated anytime on the system.  
  • Centralized records – Employee profiles created during onboarding sync across scheduling, payroll, and attendance systems, reducing errors and duplication. That means there’s only one source of truth for wages and tip calculations. 
  • Automated tip pooling – Tips can be pooled and distributed automatically, in line with your chosen method, and integrated directly into payroll. Workforce.com even allows integration with your POS to calculate and share tips seamlessly.
  • Streamlined payroll – Simplify payroll calculations, even with pooled tips. Payroll computations even with pooled tips are simpler. Workforce.com’s payroll system automates calculations, from hourly wages, deductions, and tip distributions, using employee data and predefined rules. No complications every pay period, just accurate wages, all the time.
  • Recordkeeping – Employers must adhere to recordkeeping rules regarding tip pooling. Stay audit-ready with detailed records of tip pooling distributions. Workforce.com ensures compliance and provides accessible data for employee inquiries or regulatory checks.

If implementing a tip pooling system feels overwhelming, let Workforce.com simplify it. It can help you comply with wage laws while streamlining the entire process. Ready to see how Workforce.com can help you with tip pooling, payroll, and managing your restaurant team? Book a demo and see it in action.

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Your guide to tipping laws by state (2025)

Astronaut Grabbing a Tip Jar

Summary

  • Tipping laws vary by state, and HR professionals need to navigate the specific requirements to ensure compliance. — More

  • Employers can choose from different tip policies, such as tip splitting, tip sharing, or tip pooling, to establish the fair distribution of tips among employees.

  • Payroll software streamlines tip calculations, simplifying the process for employers and ensuring accurate and fair tip distribution.

In the United States, tipping has become deeply ingrained in our culture, more so than in many other countries. Michael Lynn, a professor of consumer behavior and marketing at the Cornell University School of Hotel Administration, told NBC the US is “the most tip-happy country.” In many other countries, leaving a small tip is optional and extra, but tipping in the US holds a far more substantial role. The livelihood of employees in certain sectors depends on gratuities as they are baked into their hourly wages.

For HR professionals, managing a workforce in a tipped industry presents unique challenges. Ensuring compliance with the specific laws governing how these employees should be paid is a delicate task. Understanding the intricacies of tipping laws is crucial to avoiding potential legal pitfalls and ensuring fair compensation for employees.

Adding to the complexity is the interaction of tipping with overtime regulations. Determining the proper calculation of overtime pay for tipped employees requires a nuanced understanding of the rules and regulations. Failure to comply with these guidelines can result in costly legal consequences for businesses.

This guide will break down all federal and state tipping laws to help you navigate the intricate landscape of gratuity regulations. 

Click here to jump to a table outlining each state’s minimum wage laws for tipped employees.

What is the US tipping law?

According to the IRS, tips are discretionary payments made by customers to employees. This includes cash tips received directly, tips left through electronic settlement or payment methods, the value of noncash tips, and tip amounts received through tip pooling or tip-sharing arrangements.

The Department of Labor (DOL) defines a tipped employee as “any employee working in an occupation in which he or she regularly receives more than $30 a month in tips.” Examples of tipped employees include servers, bartenders, hotel staff, valets, and other service-industry workers who rely on tips as a significant part of their income.

Tipped employees receive a special form of hourly wage known as a tipped wage. The tipped wage is a lower direct wage (known as “tip credit”) paid by employers to tipped employees, with the expectation that the employee’s tips will supplement their earnings and meet or exceed the federal minimum wage requirement. 

According to the DOL, federal law states that employers of tipped employees are required to pay a direct wage of $2.13 per hour as long as the combined amount of tips and the direct wage equals or exceeds the federal minimum wage. However, many states have higher direct wage requirements for tipped employees that employers must adhere to.

Consider a restaurant server who receives a direct wage of $2.13 per hour and earns an average of $20 per hour in tips. To determine compliance with the law, we calculate the total hourly earnings by adding the direct wage and tips:

Direct Wage: $2.13 per hour

Tips: $20 per hour

Total Hourly Earnings: $2.13 + $20 = $22.13

In this scenario, the server’s tips of $20 per hour ensure compliance with the law. Since the total hourly earnings ($22.13) exceed the federal minimum wage requirement, which is currently set at $7.25 per hour, the server is receiving appropriate compensation.

Tipping laws by state

While federal law sets the groundwork for tipping regulations in the United States, it is important to note that individual states have the authority to establish their own tipping laws. These state-level variations can significantly impact the requirements and practices surrounding tipping in different parts of the country.

To gain a comprehensive understanding of tipping laws in each state, we have provided detailed tables below that break down the regulations. These tables will help you navigate the specific requirements for maximum tip credits and minimum cash wages in each state.

But first, let’s define two key terms that play a crucial role in understanding tipping laws.

Maximum tip credit: The maximum tip credit refers to the amount that employers are allowed to offset the minimum wage requirement by considering the tips received by their employees. This credit can vary from state to state, and understanding the specific maximum tip credit in each jurisdiction is essential for employers and employees alike.

Minimum cash wage: The minimum cash wage represents the lowest hourly rate that employers must pay to tipped employees directly, regardless of the tips they receive. While some states align the minimum cash wage with the federal standard, others have established higher cash wage requirements to ensure fair compensation for tipped workers.

To explore the specific tipping laws in your area in more detail, click on the link provided for each state. 

State Minimum cash wage Maximum tip credit Total tipped minimum wage rate
Alabama** $2.13 $5.12 $7.25
Alaska $11.91 – $11.91
Arizona $11.70 $3.00 $14.70
Arkansas $2.63 $8.37 $11.00
California $16.50 – $16.50
Colorado $11.79 $3.02 $14.81
Connecticut***** $16.35   $16.35
Delaware $2.23 $12.27 $15.00
Florida * $9.98 $3.02 $13.00
Georgia ** $2.13 $5.12 $7.25
Hawaii *** $12.75 $1.25 $14.00
Idaho $3.35 $3.90 $7.25
Illinois $9 40% of the applicable minimum wage ($6) $14.00
Indiana $2.13 $5.12 $7.25
Iowa $4.35 40% of the applicable minimum wage ($2.90) $7.25
Kansas**** $2.13 $5.12 $7.25
Kentucky $2.13 $5.12 $7.25
Louisiana** $2.13 $5.12 $7.25
Maine $7.33 50% of the applicable minimum wage ($7.32) $14.65
Maryland $3.63 $11.37 $15
Massachusetts $6.75 $8.25 $15
Michigan 38% of the applicable minimum wage ($4.01) $6.55 $10.56
Minnesota $11.13 – $11.13
Mississippi** $2.13 $5.12 $7.25
Missouri $6.88 50% of the applicable minimum wage ($6.87) $13.75

Montana

Businesses with gross annual sales over $110,000

Businesses not covered by FLSA standards with gross annual sales of $110,000 or less

$10.55

$4

 –

$10.55

$4
Nebraska $2.13 $11.37 $13.50
Nevada**** $12 – $12
New Hampshire $3.27 $3.98 $7.25
New Jersey $5.26 $9.87 $15.49
New Mexico $3 $9 $12
New York – Maximum tip credit varies by region. Consult New York’s Minimum Wage Overview for more information. $15
North Carolina $2.13 $5.12 $7.25
North Dakota $4.86 33% of the applicable minimum wage ($2.39) $7.25
Ohio $5.35 $5.35 $10.70
Oklahoma**** $2.13 $5.12 $7.25
Oregon $14.70 – for exceptions in the Portland Metro and non-urban counties, check Oregon’s Minimum wage increase schedule – $14.70
Pennsylvania $2.83 $4.42 $7.25
Rhode Island $3.89 $11.11 $15.00
South Carolina** $2.13 $5.12 $7.25
South Dakota $5.75 50% of the applicable minimum wage ($5.75) $11.50
Tennessee** $2.13 $5.12 $7.25
Texas**** $2.13 $5.12 $7.25
Utah**** $2.13 $5.12 $7.25
Vermont $7 $7.01 $14.01
Virginia $2.13 $10.28 $12.41
Washington $16.66 – $16.66
West Virginia $2.62 70% of the applicable minimum wage ($6.13) $8.75
Wisconsin $2.33 $4.92 $7.25
Wyoming $2.13 $5.12 $7.25

*Florida — The minimum wage is scheduled to increase by $1.00 every year on September 30th until it reaches $15.00 on September 30, 2026.

**Alabama, Louisiana, Mississippi, South Carolina, and Tennessee have no state minimum wage laws. Georgia has a state minimum wage law; however, it does not extend to tipped employees. 

***Hawaii — “The combined amount the employee receives from the employer and in tips must be at least $7.00 more than the applicable minimum wage.” (Source) 

****In Kansas, Oklahoma, Texas, and Utah, employees subject to the FLSA are excluded from state minimum wage laws. Employers must ensure these employees are paid at least the federal minimum wage of $7.25 per hour.

*****In Connecticut, employers can take a tip credit for bar and hotel employees. For restaurant and hotel wait staff, employers must at least pay $6,38 and may take a maximum tip credit of $9.97. Meanwhile, they should pay at least $8.23 and can take a maximum tip credit of $8.12 for bartenders who normally receive tips.

What tipping model should my business follow?

Implementing a tip policy is an important consideration for employers as it establishes guidelines on how tips are distributed among employees and can contribute to a fair and harmonious work environment. When it comes to tip policies, there are various models that businesses can adopt, each with its own implications and considerations.

One common approach is the “everyone keeps their tips” policy, where each employee retains the tips they earn at the end of their shift. While this policy appears straightforward, it can raise concerns about fairness. In a restaurant setting, for example, only customer-facing staff, such as waitstaff and bar staff, receive tips under this policy. Essential back-of-house employees like dishwashers and bussers are left without tips. This can create a disparity, potentially leading to a shortage of back-of-house employees who do not benefit from additional tips.

Another approach is tip splitting or tip sharing, where tips are divided among both tipped and non-tipped employees based on hours worked or predetermined percentages. Tip sharing is usually voluntary, without specific legal guidelines. This policy ensures that all employees have the opportunity to receive tips, fostering a more equitable environment.

Tip splitting can be complex from a payroll perspective when calculating employee wages. Employers must ensure that non-tipped employees receive at least the minimum wage, including their share of tips (which are also subject to taxation). Additionally, the proper application of tip credits to the wages of tipped employees is crucial. It is important to maintain fairness and ensure that non-tipped employees do not out-earn their tipped counterparts due to tip credit rules.

Tip pooling is another option involving the collection of tips earned during a shift and their equitable distribution among both front-of-house and back-of-house staff. Under the Fair Labor Standards Act (FLSA), if tips are shared with non-tipped staff, employers must pay the full minimum wage without applying tip credits. While tip pooling promotes fairness by providing all employees with a consistent hourly wage and shared tips, it may not be a viable solution during slower periods when tips are scarce.

Ultimately, the tipping model your business chooses should align with your company’s values, industry standards, and the preferences of your service employees. Consider the dynamics of your workforce, the potential impact on employee morale, and the legal requirements specific to your jurisdiction when determining the most suitable tip policy for your organization.

Streamline tip calculations with Workforce.com

No matter which tipping policy you choose to adopt, handling tip calculations can be a daunting task. The good news is that Workforce.com can be a valuable ally in simplifying this process. By seamlessly integrating with your POS system, you can customize the percentage of tips to be shared via a “tip jar” feature and automatically ensure that your employees receive their rightful earnings based on their hours worked. 

If you’re interested in discovering how proper time and attendance tracking and payroll processing can revolutionize your tip management, reach out to us today. We’d be delighted to guide you through the process.

This information is for general purposes only and should not be considered legal advice. While we strive to keep it updated, laws and regulations can change at any time. It’s always a good idea to consult with a legal professional or relevant authorities to compliance with the most current standards.

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Restaurant Tipping Laws [Federal + State]

Business owners in the restaurant industry are in a unique position when it comes to employee tips. As an employer, it is important to create a fair system for employees that makes sure employees are rewarded for their service, and also comply with IRS regulations.

There are a lot of nuances when it comes to federal and state wage laws and restaurant owners have a responsibility to implement policies that are legal yet rewarding for staff. Consider these two strategies to ensure your business remains fair but compliant.

What are tips?

Tips are optional payments received by employees from customers, typically in exchange for good service. Tips make up a large part of earnings as approximately $36.4 billion is earned in tips by tipped workers annually. A tipped employee is an employee that earns more than $30 a month in tips.

What does the law say about tips?

The law around tips differs on the federal, state and local levels. However, there are characteristics that remain the same throughout:

  • A tipped employee is an employee that earns more than $30 a month in tips
  • Employees who do not earn tips —also known as “non-tipped employees” (cooks, cleaners, dishwashers etc) must be paid the minimum wage
  • Tips are considered wages
  • Tips are strictly the property of the employee— there is no legal arrangement where an employer receives part of an employee’s tips. This is considered wage theft.

Federal Law

Federal law concerning tips is dictated by the Fair Labor Standards Act (FLSA) as mandated by the Department of Labor (DOL). This law tackles wages, work hours and minimum wage requirements.

You are required to pay $2.13 per hour in direct wages on the basis that what your employee earns in tips will equal the federal minimum wage. For example, your waiter works 30 hours a week and receives $200 in tips for that week. Your employee’s earnings look like this: $2.13 x 30= $63.90 ( which is called the cash wage) plus the tips of $200, which brings the total to $263.90. Their hourly wage works out to $8.79, (earnings divided by total hours) which exceeds the federal minimum wage.

In another week, your waiter works a 30-hour week again, but this time only receives $100 in tips. The waiter’s earnings look like this: $2.13 x 30=$63.90 plus the tips of $100, making the total $163.90. The hourly wage is $5.46. This does not exceed the federal minimum wage, so you must pay the waiter a tip credit to fill the gap and fulfill the minimum wage requirement ($7.25).

Tip crediting is the process of applying the tips towards your employee’s wage to ensure you are paying the full amount. In the example above, the $5.46 hourly pay does not meet the minimum wage, so the employer must fill that gap by paying the waiter an additional $1.79 per hour.

State Law

It is always important to check your local state laws on the Department of Labor (DOL) website.

Some states such as Minnesota, Oregon and California —do not allow tip credits under any circumstances. In California, the minimum wage is $14 per hour for employers that have more than 26 employees and $13 per hour for employers with 25 and below employees. Employers in these states must pay the full state minimum wage to their employers. Therefore your employees receive tips on top of their wages.

Although wage laws require employers to ensure that employees’ tips bridge the gap to make the $7.25 per hour minimum wage, it may improve employee morale and reduce turnover to go beyond that rate of pay. Especially now, when there’s a labor shortage, attracting restaurant employees is difficult and workers are demanding better working conditions. It’s not uncommon to see workers walking out or refusing to work for such low wages.

How are taxes reported on tips?

Tips are subject to employment taxes including Federal Insurance Contributions Act, (FICA), Federal Unemployment Tax Act, (FUTA) and Federal income tax withholding. This makes you liable for different payroll and tax obligations. You must pay the employer’s portion of FICA and FUTA taxes. This can influence your decision on which tipping policy to implement for your staff. Here’s the basics of tax reporting on tips:

  • Your employees are responsible for reporting all cash tips to you if they exceed over $30 and this must be done by the 10th of the following month of when the tips were received. For example, a waitress earned $550 in tips in February, so this needs to be reported to the manager by March 10th.
  • It is important you create an open environment for your employees to declare their tips to you, so you can fulfill these tax obligations.
  • If your employee refuses to report their tips to you, you are not liable for the employer’s share of FICA until the IRS is notified.

What are the options for tip policies in restaurants?

As a restaurant owner, here are three tip policies you could implement:

Everyone keeps their tips

Each employee keeps the amount of tips they earned at the end of the shift. Whilst this is a straightforward policy, it can be considered unfair. Only customer-facing staff (waitstaff and bar staff) would receive tips, this excludes back of house staff like dishwashers and bussers—who are also integral to the hospitality industry. This policy could lead to less back of house employees as they do not see any extra benefits.

Tip splitting or tip sharing

Tip splitting involves splitting the tips between tipped and non-tipped employees based on hours worked or by role-based percentages. Tip sharing is voluntary and there are no guidelines or laws. This policy ensures all employees receive tips, creating a fair environment.

Tip splitting can be confusing from a payroll perspective because you have to ensure your non-tipped employees receive the minimum wage plus their tips (which will also be taxed). Plus you have to ensure that you are applying the correct tip credits to the tipped employees’ wages even though their tips are being split. You also want to ensure that the non-tipped employees are not out-earning the employees who actually earn the tips due to the tip credit rules.

Tip pooling

Tip pooling consists of collecting the tips earned during a shift and evenly distributing the tips at the end of the shift. The tip pool is shared between both front and back staff.

Tip pooling is covered by the FLSA. You cannot apply a tip credit to employees’ wages who share tips with non-tipped staff, therefore you must pay the full minimum wage. For instance, normally you can apply a tip credit to the front-of-house staffs’ wages. But if they are part of a valid tip pool agreement where they will be sharing their tips with back of house staff, you cannot apply tip credits.

This policy is equitable, employees receive a fair hourly wage and the tips are also shared amongst all employees. But tip pooling may not be a sustainable solution when there are slow periods and you are operating with less turnover. Your staff may be disappointed that their tips are being split when there are fewer tips going around.

Which is best: tip splitting or tip pooling?

From a compliance perspective, tip pooling may be the best option. It is easy to calculate the tips and wages—you can easily keep up with your employee earnings. Everyone is earning the minimum wage plus tips, there are no calculations for tip credits.

A tip pooling policy also might help you attract staff—you are offering a benefit to prospective employees. A fair wage plus the potential of earning tips for all staff. However, it might be a good idea to let your employees choose which policy they want to be implemented. This gives your staff a voice and agency to set the conditions that they want to work under.

Manage tip calculation headaches

Whichever policy you decide to implement, the bad news is there are some calculations waiting for you. The good news is, workforce management software can help. Oftentimes you can connect it to your POS system, set the percentage of tips to be shared, and your employees automatically get what they’re owed based on hours worked. Learn more about how proper time and attendance tracking can help you manage tip calculations by contacting us. We’d love to talk you through it.