Illinois tip pooling and service charges for restaurants

Employees may run a tip pooling arrangement, and the federal rules set the limits: owners, managers and supervisors may not take tips from a pool, and a compulsory service charge is not a tip. A service charge that your business keeps is generally revenue, and one that you pay to employees is treated as wages. The wording on the menu and the check decides which you have.

Who can share in a pool?

The Department of Labor's fact sheet draws the line between businesses that take a tip credit and those that do not. If you take a credit, a mandatory pool may include only employees who customarily and regularly receive tips, such as servers, bussers and bartenders. If you pay the full minimum wage in cash and take no credit, a pool may include cooks and dishwashers too, but everyone in it must receive at least the minimum wage in cash.

Who is never in the pool?

Employers, managers and supervisors may not receive tips from any pool. The Department treats an owner with at least a 20 percent equity interest who actively manages the business as a manager for this rule. A manager can keep only a tip a customer gave directly for service the manager personally provided.

How is a service charge different?

A compulsory service charge, such as 18 percent of the bill, is not a tip, according to the Department of Labor. It is generally the employer's money unless you decide to pay it out. If you pay it to employees, it is treated as wages, which means it is included in the regular rate for overtime and subject to payroll taxes, and it cannot be counted toward the tip credit. State this in your policy so the treatment is clear.

Can you deduct card fees from tips?

Federal rules allow an employer to deduct the percentage it pays the card company from card tips, so a 3 percent fee allows payment of 97 percent of the tip. The deduction cannot exceed the card company's fee, cannot push wages below the minimum and cannot delay payment of the tips. Check with the Illinois Department of Labor whether state rules add a limit, and read the Illinois guide on the interchange fee law, which covers how card fees treat the tip portion of a transaction.

When must tips be paid?

Tips collected for a pool must be distributed by the regular payday for the workweek or pay period. Late payouts become wage claims, which an employee can bring to the state Department of Labor or to court.

A worked example of a weekend pool

Friday and Saturday produce $3,000 in tips. Servers work 120 hours, bussers 60 and the bar 40, a total of 220 hours of pool time. Your policy divides the pool by hours, weighted by role: servers at 1.0, bar at 1.0 and bussers at 0.5. Servers earn 120 weighted hours, bar 40 and bussers 30, a total of 190. A server working 20 hours earns 20 divided by 190 times $3,000, which is about $316. The calculation sheet shows each person the same numbers.

What should the policy say?

1. Who is in the pool and how the weights are set.
2. When tips are paid.
3. That managers and owners are excluded.
4. How a service charge is treated.
5. How card fees are handled.

What records protect you?

Pool calculations for every period, hours by person, card tips by day and signed copies of the policy. If a claim is made, the records are what you show.

How do you handle disputes about the pool?

When an employee questions a share, ask for the question in writing, check the calculation sheet and answer within a few days. If a mistake was made, correct it in the next payroll and note the change. If the formula is the issue, explain how it was set and when it was last changed. A manager who handles the question with the paper in hand ends most disputes quickly. Keep every complaint and answer in a file, and if a pattern appears, such as the same shift or the same error, fix the cause rather than the single case. Review the written policy with your accountant once a year, and give every new hire a copy on the first day.

What about shared tips with the bar?

A bar often tips out to bussers and barbacks, and servers tip out to the bar. Write each tip-out as a percentage of sales or tips, say who receives it and treat it as part of the pool rules. A tip-out that goes to a manager or an owner is not allowed.

More guides for your business:

• Illinois tipped minimum wage: state, Cook County and Chicago
• Illinois mandatory gratuity and sales tax for large parties
• Illinois interchange fee law and card fees on tips and tax

More in the US guides for food businesses.