Most restaurants rely on “the way it has always been done,” or the way their POS system is set up, to run a tip pool. Both methods are likely to get you sued, sooner or later, because “the way things have always been done,” or the way your POS system was set up, is not, necessarily, legal. As I have told countless clients, your payroll company, or POS company, setting up your system incorrectly, is not a defense to an illegal tip pool. The fact that other restaurants do the same tip pool you do, is irrelevant, most restaurants get it wrong and leave themselves open to lawsuits, and, recently, there have been a lot of lawsuits filed, over tip pooling.
The first thing that employers get wrong is that they include untipped workers in the tip pool. Including someone that the law considers and untipped employee, in your tip pool, invalidates your tip pool for Fair Labor Standards Act (FLSA) purposes, unless you meet the exemption below. A tipped employee is someone who is not salaried, and directly serves the customer. https://www.dol.gov/whd/regs/compliance/whdfs15.pdf.
There are proposed rules issued by the Department of Labor to change this and the way that tipped employees are paid, for further information see, https://www.restaurantbusinessonline.com/workforce/new-tip-pooling-tip-credit-rules-proposed-dol.
A rule went into effect in March of 2018 allowing back of house employees to be tipped as part of a tip pool. However, in order for an employer to use this exception, all employees in the tip pool must be paid the full state minimum wage, the employer may not take a tip credit. Seeing as almost all employers take a tip credit, we will not discuss this further, but more information is available at https://medium.com/@hello_5766/the-new-tip-pooling-laws-for-restaurants-what-you-need-to-know-in-2018-fec8e898b522
That brings up a lot of questions about who can be included. A bus boy is not included, neither is a bar back, however, under certain circumstances, bartenders can be included, and in other circumstances they cannot be. A tipped employee is someone who spends the majority of their time serving the customer, or at least enough to affect the customer experience. Hence, a hostess is not typically a tipped employee, but if that hostess also refills drinks, and helps serve food, they are a tipped employee. Runners can be tipped employees, but expeditors cannot. Kitchen staff are not tipped employees, unless you pay everyone in the tip pool the full state minimum wage, without taking a tip credit.
A manager is never a tipped employee, the number one way that I see clients get tip pools wrong, is by including the manager in the tip pool. Whether you pay a manager an hourly rate, or a salary, they are untipped employees. So, to be part of the tip pool, someone has to be an hourly employee, who significantly impacts the customer’s experience through directly serving the customer.
Once you establish who a tipped employee is, which you may need a labor lawyer to help you with, you must set up the tip pool correctly. You must track all tips in the strictest possible fashion. Many restaurants I see getting sued do not track cash tips, and that is part of the reason they are getting sued. It may be difficult to track cash tips, nearly impossible, but the law requires you to do it, and you can get sued for labor violations, and face issues with the IRS, if you do not.
Next, you also must make three things clear to the employee. First that if for any reason the employee does not get minimum wage under the tip pool, the employer will make up the difference. Second, that the employees are being paid as part of a tip pool, and how that tip pool works. Third, that the employee will not make less than they were tipped, except for any “tipouts” to tip pool employees. Literally, there is no protection greater than having a labor lawyer put this in writing and having the employee sign it, you also need to have your state’s version of the worker’s rights poster in a place where all employees will see it.
