Tip pooling and service charges: the federal basics for owners

Under federal law, tips belong to the employees who earn them. An employer, and any manager or supervisor, may not keep any part of them, and a mandatory service charge is not a tip at all: it is the restaurant's money. States add their own rules on top, often stricter, so use this as the federal starting point and check your state law with a payroll professional or employment lawyer before you change anything.

This guide covers only the federal Fair Labor Standards Act, as the US Department of Labor explains it in its Fact Sheet 15. It is general information, not legal advice.

Who counts as a tipped employee under federal law?

The Department of Labor treats someone as a tipped employee when they work in a job where they customarily and regularly receive more than $30 a month in tips. Servers, bartenders, bussers and counter staff who serve customers are the usual examples.

What is the tip credit?

Federally, an employer may pay a tipped employee a cash wage as low as $2.13 an hour and count part of their tips toward the federal minimum wage of $7.25 an hour. The difference, up to $5.12 an hour, is the tip credit.

Three conditions matter:

• The employee must end up with at least $7.25 an hour for every hour worked in the workweek, combining the cash wage and tips. If tips fall short, the employer makes up the difference.
• Employees must be told about the tip credit in advance.
• The credit can never be more than the tips the employee actually received.

Many states set a higher minimum wage, a higher cash wage for tipped workers, or ban the tip credit altogether. In those states, the state rule applies.

Who can share in a tip pool?

A tip pool combines tips and shares them out among staff. Under federal law:

• The employer, managers and supervisors may not receive tips from the pool, whether or not the employer takes a tip credit.
• If you take a tip credit, the pool can only include employees who customarily and regularly receive tips, such as servers, bartenders, bussers and counter staff.
• If you pay everyone at least the full federal minimum wage and take no tip credit, a 2018 change to the law allows the pool to include back-of-house staff such as cooks and dishwashers.
• Tell employees what they are required to contribute to a pool.

Who counts as a manager or supervisor has its own federal test. If your shift leads or working owners touch the pool, get advice first.

Is a service charge the same as a tip?

No. The Department of Labor is clear that a compulsory charge for service, such as a set percentage added to the check for a large party, is not a tip. It belongs to the business and is part of its gross receipts.

That has consequences:

• You decide how a service charge is used. You can share it with staff as wages, but money paid out from it counts as wages, not as tips.
• It cannot be counted toward the tip credit.
• It may count toward minimum wage and overtime obligations, as wages.

Separately from federal labor law, guests deserve to know what a service charge is and where it goes. Several states and cities have rules on how service charges must be described on menus and checks, and some require the money to go to staff. Say plainly on the menu and the check what the charge is for.

How do card tips and payroll fit in?

Tips paid by card still belong to the employee, and they have to reach staff through payroll in a way you can show on paper. Keep a record of the tips each employee receives each shift, because you need it both to show the minimum wage was met and for tax reporting. Ask your payroll provider how card tips, cash tips and any pool shares are recorded, and whether any card processing cost can be passed on under your state's rules.

What happens if tips are taken improperly?

Under the 2018 amendment, an employer who keeps tips can be liable for the tips taken, plus additional damages and civil penalties, as the Department of Labor explains. Getting this wrong costs more than getting advice.

How do you set up a fair tip pool?

Write the policy down before you start. Include:

1. Who is in the pool and why each role qualifies
2. How shares are worked out: by hours, by points per role, or a mix
3. How often tips are paid out and how card tips reach staff
4. How new staff are told, in writing

Then apply it every shift. Most tip disputes start with a rule that changed without anyone being told.

What should you check at state and local level?

Before you finalize anything, check with your state labor department, or with a payroll provider or employment lawyer, on these points:

• The state minimum wage and tipped cash wage
• Whether the state allows a tip credit at all
• Who may share in a tip pool under state law
• How service charges must be disclosed, and who gets them
• Any city minimum wage that sits above the state one

The federal rules are the floor. In many states the rules are stricter, and the stricter rule is the one you follow.

More guides for your business:

• How to start a pop-up or food truck in a US city
• Allergen rules for US restaurants: the nine major allergens
• Health permits and food manager certification for US restaurants

More in the US guides for food businesses.