Editor’s note: This is the third article in a series where we’ll ask Courtney Leyes and Emily Litzinger, employment lawyers at Fisher Phillips, employment law questions specific to the restaurant industry. The first, on hiring minors, can be found here. The second, on how to accommodate pregnant and breastfeeding employees, can be found here.

Question: Running our establishment is a team sport, and we have been considering using a tip pooling system to recognize this overall sense of shared effort. What do we need to know? 

Can you set up a tip pool in your quick-service restaurant?

It depends. Many quick-service-restaurant businesses are changing their compensation models to include tip pools to ease the burden of labor costs. But if not done the right way, an unlawful tip pool can get employers into trouble in the form of drawn-out wage and hour audits, assessment of civil money penalties or a potential lawsuit. In the last year, there has been a significant uptick in federal and state government agencies’ enforcement of wage and hour laws relating to tip pools and class and collective lawsuits are on the rise. To avoid getting caught in a tip pool mess, here are some tips. 

Set Clear Parameters for Your Tip Pool

Tip pooling is the practice of collecting all or part of the tips received by employees into a pool and then redistributing them among tipped employees. This can either be mandatory or voluntary, depending on your jurisdiction. If an employer takes a tip credit on the tipped employees’ wages, which amounts to a subminimum wage of at least $2.13 per hour in states that follow the federal Fair Labor Standards Act (“FLSA”)—the pool must be limited to “tipped employees” who customarily and regularly received $30 or more in tips a month (i.e., front-of-house employees). 

Determine Participants and Prohibit Managers, Supervisors and Owner.

The No. 1 rule: managers, supervisors and owners are strictly prohibited from receiving distributions from the tip pool. Unlawful supervisor and manager participation in tip pools has recently been one of the most litigated and enforced rules relating to tip pools. So, you say, who is a manager? A “manager” is defined as someone whose primary duty is management of the enterprise or a customarily recognized department, customarily directs the work of two or more full-time employees and has the authority to hire or fire or make those recommendations. Note even employees who are not salaried or exempt under the FLSA still could be considered “managers” if they perform these duties. 

What about managers and/or supervisors who fill in and wait tables? While managers and supervisors are prohibited from retaining tips earned by other employees, they are permitted to retain tips they receive directly from customers based on the service that the manager or supervisor directly and solely provided. Additionally, managers and supervisors may still contribute to the tip pool, but not collect a distribution.

Consider The Complications of the Tip Credit.

To spread the wealth and create a more customer focused environment, many quick-service restaurant employers have created mixed tip pools that allow back-of-house employees—such as cooks and dishwashers who are not traditionally tipped employees—to share in the tips received by front-of-house employees. This generous effort, however, is not without its potential landmines. While federal law allows mixed tip pools, each participant must receive at least the minimum wage. That means employers cannot utilize the tip credit for servers and other traditionally tipped employees if they are sharing in the pool with non-tipped employees (back-of-house). 

If you have a mixed tip pool (with back-of-house and front-of-house), make sure everyone is paid at least minimum wage. Otherwise, limit the tip pool to only tipped employees (front-of-house). You should also check the applicable state law, as some states have stricter rules and very specific requirements for tip pooling. And of course, if you have any questions, please consult with your trusted legal counsel. 

Courtney Leyes and Emily Litzinger are employment lawyers at Fisher Phillips where they regularly partner with restaurant industry clients to minimize liability and reduce risk with preventative strategies focused on compliance, training, and the implementation of best practices. Having both worked in the industry, they understand the delicate balance restaurant employers face when managing a diverse and ever-changing workforce in today’s complex legal landscape.