Labor: The benefits and obstacles to a valid tip pooling arrangement

Understand the legalities of the "tip credit"

Pursuant to 29 U.S.C. § 203(m), employers in states that permit tip credits may pay less than the minimum wage to employees who receive tips. This is known as a “tip credit.” Under the tip credit rule, the restaurant employer takes credit for the employee’s tips to make up the difference between the reduced wage paid by the employer and the legal minimum wage. Currently, the federal minimum hourly wage for nontipped employees is $7.25. The federal tipped employee minimum wage is $2.15. 

The tip credit may be taken only toward the wages of employees who qualify as “tipped employees,” who are defined as “any employee engaged in an occupation in which he customarily and regularly receives more than $30 a month in tips.” 29 U.S.C. § 203(t). The tip credit is not permitted in Alaska, California, Minnesota, Montana, Nevada, Oregon and Washington. In some states, a tip credit is allowed, but the wage rate differs from the federal minimum rate. For example, Michigan uses a tipped minimum rate of $2.65, and Pennsylvania uses $2.83.

Two conditions must be satisfied before tip credits can be taken by an employer: the employee(s) must be informed of the tip credit provisions; and all tips received by the employee must be retained by the employee, except where tip pooling is permitted among employees who customarily and regularly receive tips. 29 U.S.C. § 203(m).

The legal issues arise in the second requirement, regarding the tip pooling arrangements. The basic concept is simple: A tipped employee who obtains assistance to complete his or her job from bussers, hostesses and bartenders pays a portion of his or her tips to these assistants. The rates vary by employer and the nature of the services, but generally no more than five percent of the tips accumulated by the server can be distributed at the end of each shift to the team members providing assistance.

Obviously, for some restaurant businesses, the opportunity to pay less than minimum wage to their employees decreases their expenses and effectively transfers a significant portion of overhead from the business to its customers. As a result, the U.S. Department of Labor has imposed extensive regulations to prevent abuses. Included in the regulations are prohibitions from taking any pooled tips for management. In Capsolas v. Pasta Resources, Inc., celebrity chef Mario Batali and his business partner in Pasta Resources agreed to pay more than $5 million under a proposed settlement agreement to employees of their restaurants. Pasta Resources was accused of taking the equivalent of 4 percent to 5 percent of each shift’s wine or other beverage sales for management, while paying the wait and support staff the reduced tipped employee minimum wage. This case was ultimately resolved under New York state law, but is equally applicable in the federal arena.

However, in Chau v. Starbucks Corp., the California Court of Appeal overturned the lower court’s order requiring Starbucks to pay $105 million to baristas who had been required by company policy to pool tips with supervisory workers. The distinction between Chau and Capsolas lies in who is involved in the tip pool. Supervisors who work alongside employees while serving customers, can often participate in tip pools. However, agents of the employer, including owners, cannot.

Restaurant owners should take full advantage of the benefits of tip credits and tip pooling when possible but only after a careful review of the applicable regulations and confirmation of the qualification of the particular participants.

Contributing Author

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Cheryl Wilke

Cheryl Wilke is a partner in the Ft. Lauderdale office of Hinshaw & Culbertson and focuses her practice in the representation of employers in...

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