How to Reduce Legal Issues with Tipping Practices

The most common denominator by far throughout the lawsuits that have affected dining and service establishments nationwide has been a pattern of incorrect tipping practices by their business management. Indeed, with the introduction of a new law in 2018 that changed the game for tip pooling, complying with tip sharing and tip pooling laws became a much more complex affair.

The good news is that more often than not, mistakes made about tipping practices usually stem from a lack of basic knowledge or understanding around how tip-sharing actually works and how to correctly disperse tips amongst employees when pooling them together. In this post, we’ll clarify just that – giving you peace of mind and confidence in your front-of-house and back-of-house employee operations.

Why Do Tip Sharing Laws Matter?

It’s fairly standard practice for employers to require their workers to participate in putting their tips together and then splitting them evenly: this is called a tip pool. When the staff of a restaurant or bar does this, employees will have to divide a portion of their tips amongst their coworkers. This is actually where so many legal issues are born: it’s illegal for any managers or business owners to take any part of the tip pool for themselves. 

Prior to 2018, federal law prohibited extending tip pooling to back of house employees. Now, due to the Fair Labor Standards Act, including BOH employees in a  tip pool or sharing a portion of tips with the BOH is legal – provided that the employer does NOT take a tip credit and pays their workers minimum wage upfront. 

Tip Pooling Best Practices

An article on FullService Restaurants recommends the following three ways to avoid getting into hot water with incorrect tip sharing practices.

1. Always make sure to have a formalized, written policy. This document should be readily available to both employees and to anyone on the legal side – should any issues start to arise, having expectations clearly written out can go a long way in preventing a larger discrepancy, or at worst, a lawsuit. Any documentation should highlight who shares tips with whom, and how much they’re required to share at a given time. Some tip distribution software will do this for you via an employee app.
2. Make sure you’re clear about who is not participating. When evaluating your chain of service (those who help provide the customer experience,) business owners typically don’t consider BOH staff to be involved, so they don’t partake in the tip pooling. It is common for the BOH staff to be given a percentage of food sales though.
3. Specify how much tips staff can contribute at their discretion. It’s always a good idea to give your employees an opportunity to contribute more: due to the interpersonal nature of service, your teammates will likely come across situations where they might want to share more tips after solving a challenge together. According to FSR, business owners should “draft language in your tip pooling policy that gives team members the latitude to share more of their tips, but only if the individual does so without pressure.” Some software solutions in this space allow tip earners to send their tips to a coworker via a phone app which makes things very easy for both the employee and the managers.

How to Make Sure Your Tip Pooling/sharing is Legal 

If you’re considering setting up a tip pool, always make sure you keep these key takeaways in mind:

• If an employee does not get paid minimum wage (in a combination of cash wage and tip credit) as required by their state, employers have to pay to make up the difference.
• All employees should be briefed on their tip pooling – or tip-sharing – policy. You can read about the specific differences between the two HERE.
• No business owners or managers are allowed to participate in the tip pool.
• Back of house employees can only take part in tip pools if the owner doesn’t use their tip credit.

TipHaus is a turnkey automated tip distribution software created to integrate directly with the Point-of-Sale system in place. TipHaus was created by Restaurant consultants to save managers and staff members time, money, and potential legal liability.