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August 09, 2022
Tips, Tip Pooling, and Tip Credits: What Can Restaurant Legally Do with Its Tips?

by Cara Butler

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Employees in a restaurant setting often receive tips, and employers frequently take a “tip credit” toward the minimum wage they must pay. “Tip pooling” is another common practice, where all of the tips are collected and then evenly distributed among the restaurant’s employees. If employers choose to implement a tip pool or tip credit, however, they must keep the following guidelines in mind to make sure their policy complies with the Fair Labor Standards Act (FLSA).

Nontipped Employees and Tip Pools

An employer that does not take a tip credit (i.e., directly pays all employees at least $11 per hour regardless of tips received) may allow nontipped employees—such as cooks and dishwashers—to participate in a tip pool. Such an arrangement has one limitation: Managers and supervisors are prohibited from taking part in the tip pool.

What if Employer Takes Tip Credit?

If an employer chooses to take a tip credit, the guidelines get much more complicated.

A business that takes a tip credit may allow only employees who customarily and regularly receive tips to participate in the tip pool. In other words, those who don’t customarily receive tips (e.g., cooks) may not participate in the pool.

Tipped Employees and Nontipped Work

Even if you decide to take a tip credit and limit the tip pool to employees who customarily receive tips, you must be very cautious to comply with the requirements for the credit. The general rule is that you may take a tip credit only for an employee in a tipped occupation.

So, how is the tip credit calculated when a server (a traditional tipped occupation) performs other roles while at work? The U.S. Department of Labor’s (DOL) Dual Jobs Rule provides guidance for the question.

A tipped occupation includes work that (1) produces tips and (2) directly supports the tip-producing work if it isn’t performed for a “substantial amount of time.” Directly-supporting work is defined as “work performed by a tipped employee in preparation of or to otherwise assist in tip-producing customer service work.” It is performed a “substantial amount of time” if it (1) exceeds 20 percent of the hours in a week for which the employer has taken a tip credit or (2) the employee performs directly-supporting work for a continuous period that exceeds 30 minutes. If the supporting work exceeds 30 minutes, it may not be taken as a part of the tip credit, but it is excluded from the 20 percent calculation.

The rule provides the following examples of tip-producing work:

  • A server's tip-producing work includes providing table service, such as taking orders, making recommendations, and serving food and drink.
  • A bartender's tip-producing work includes making and serving drinks, talking to customers at the bar, and serving food to customers, if the bar includes food service.
  • A busser's tip-producing work includes assisting servers with their tip-producing work for customers, such as table service, including filling water glasses, clearing dishes from tables, fetching and delivering items to and from tables, and bussing tables, including changing linens and setting tables.

The rule provides the following examples of directly-supporting work:

  • A server's directly-supporting work includes dining room prep work, such as refilling salt and pepper shakers and ketchup bottles, rolling silverware, folding napkins, sweeping or vacuuming under tables in the dining area, and setting and bussing tables.
  • A busser's directly-supporting work includes pre- and post-table service prep work such as folding napkins and rolling silverware, stocking the busser station, and vacuuming the dining room, as well as wiping down soda machines, ice dispensers, food warmers, and other equipment in the service alley.
  • A bartender's directly-supporting work includes work such as slicing and pitting fruit for drinks, wiping down the bar or tables in the bar area, cleaning bar glasses, arranging bottles in the bar, fetching liquor and supplies, vacuuming under tables in the bar area, cleaning ice coolers and bar mats, making drink mixes, and filling up dispensers with drink mixes.

Work that isn’t part of the tipped occupation is any task that doesn’t provide service to customers for which the employee receives tips and doesn’t directly support the tip-producing activity. You may never take a tip credit for that time.

The following examples illustrate work that isn’t part of the tipped occupation because the task doesn’t provide service to customers for which tipped employees receive tips and doesn’t directly support tip-producing work. The list is illustrative and isn’t exhaustive:

  • Preparing food, including salads, and cleaning the kitchen or bathrooms aren’t part of the server’s tipped occupation.
  • Cleaning the dining room or bathroom isn’t part of the bartender’s tipped occupation.
  • Cleaning the kitchen or bathrooms isn’t part of the busser’s tipped occupation.

Thus, if you choose to take a tip credit, you must ensure you (1) never take a tip credit for time the employee spends doing work outside of the tipped occupation, (2) never take a tip credit for directly-supporting work that lasts more than 30 minutes, and (3) closely monitor that tipped employees don’t perform more than 20 percent of directly-supporting work during a workweek.

Takeaway

If this sounds complicated, it is. Employers choosing to take a tip credit must remain vigilant to ensure those who customarily and regularly perform a tipped occupation almost exclusively perform duties that fall under the roles of a tipped occupation. A failure to properly implement a tip credit or tip pool could leave you in jeopardy of incurring civil monetary penalties assessed by the DOL and being subject to lawsuits for FLSA violations.

Cara Butler is an attorney with Mitchell Williams in Little Rock, Arkansas. Cara counsels businesses and not-for-profits on employment and workplace issues to ensure compliance with federal, state, and local laws and advises human resources administration on hiring and termination, employee discipline, state and federal leave laws, employee handbooks and policies, and wage and hour compliance. You can reach her at cbutler@mwlaw.com.

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