Tip Pooling Laws

Tipped Employee and Tip Pooling Laws

Tip credit and pool tips is an area of employment law that can be complicated. You have the combination of minimum wage law and dictates tips for bartending and waitressing jobs.  You won’t find this explicit language in the statute. This area of employment law can be complicated. This law is found through case law, legislative history and DOL interpretations.  The first step in understanding tip pooling laws is to know that the FLSA requires employers to pay employees a minimum wage of $7.25 an hour.

 Many restaurants and bar pay their tipped employees $2.13 an hour and make up the difference in tips.  These same restaurants pay their kitchen workers and managers hourly rates. In some instances, high level managers of restaurants and bars are paid salaried. Severs have certain rights in restaurants. Servers cannot be required to pay for walkouts, mis-orders, drawer shortages, or breakages. The tip sharing laws say that gratuity and tips belongs to the servers and earned them. Tip outs to bus boys and hostesses are permitted but not to mangers and back of the house workers. 

The reason for this is that that the FLSA contains an exception that permits employers to pay less than the general minimum wage—$2.13 per hour—  to a ‘tipped employee’ as long as the employee’s tips make up the difference  between the $2.13 minimum wage and the general minimum wage.”  If business is slow or customers have been stingy on tips, the law requires that the restaurant pays the difference between the $2.13 and $7.25 an hour.   The law allows the restaurants to pool tips from all tipped employees and divide them amongst the employees who are eligible to receive tips.  This does not include managers or kitchen workers. IF a restaurants gives tip money with non-tipped employees like managers and kitchen workers, the void the tip credit and must go back and pay all the tipped employees the $5.12 difference between $2.13 and $7.25 an hour. If you multiply $5.12 by 40 hours a week x 52 hours in a year, the back pay could be over $10,000 a year. With liquidated damages, that could be $20,000 a year.

A good example would be a famous case we handled. One the most important and often cited case on tip pooling and minimum wage under the FLSA in Texas, Louisiana and Mississippi is a case that our firm successfully appealed to the Fifth Circuit court of appeals.  Montano v.  Montrose Rest. Assocs., Inc., 800 F.3d 186, 188 (5th Cir. 2015)

“In Montano, the issue presented to the Fifth Circuit was whether a restaurant’s “coffeeman” was properly included in a tip pool with waiters, bartenders and busboys. For restaurant employers, the inquiry is important because the federal Fair Labor Standards Act allows employers to claim a tip credit towards satisfying the minimum wage requirement for any employees in a properly constituted tip pool. However, a tip pool is limited to “employees who customarily and regularly receive tips.” 29 U.S.C. § 203(m). Thus, improperly including even a single employee may invalidate the entire tip pool.” https://www.natlawreview.com/article/fifth-circuit-tips-its-hand-to-analysis-flsa-s-tip-credit

The Fifth Circuit confirmed that bars or restaurants have the burden to prove its entitlement to the tip credit. To be entitled to the tip credit, the “general rule” is that all tips received by a tipped employee must be retained by that employee.   The FLSA “provides a limited exception to this rule. The FLSA permits “the pooling of tips among employees who customarily and regularly receive tips.  “If an employee is required to share tips with an employee who does not customarily and regularly receive tips,  the employer may not legally take a tip credit.”  In such a case, “the employee is owed the full $7.25 minimum wage and reimbursement of the amount of tips that were improperly utilized by the employer.” 

The Fifth Circuit agreed with us that a restaurant we sued cannot share tip with a kitchen worker who’s job was to prepare coffee.  The Fifth Circuit said:

“The test for whether an employee is one who “customarily and regularly receive[d] tips” does not depend on whether the employee “actually received tips.”  Nor does the test depend on the employee’s job title.  Instead, “one’s status as an employee who ‘customarily and regularly receives tips’ is ‘determined on  the basis of his or her activities.’”  Quoting  U.S. Dep’t of Labor, Wage & Hour Div., Fact Sheet # 15: Tipped Employees Under the Fair Labor Standards Act (FLSA) (rev. Apr.  2018).

This is why every waiter and bartender should look at the various positions at their bar or restaurant and determine if the people they share tipped with are back of the house positions or managers that do not customarily and regularly receive tips.  After all customers tip the workers that serve them and interact with them, not the general mangers or dishwashers in the back. The law says that the  central difference between employees who are traditionally tipped and those who  are not is that the former work primarily in the front of the house where they are  seen by and interact with customers, while the latter work primarily or exclusively  in the back of the house.  As a result, customarily, front-of-the-house staff like servers  and bartenders receive tips. Back-of-the-house staff like cook s and dishwashers do not receive tips, and by law cannot participate in a mandatory tip pool.