“They walked out without paying. I’m going to dock your tips from the tip pool for the cost. You know how it is. It’s just part of the business.”
How many of you reading this had this happen when you were a server in a restaurant? Almost every American performs some kind of work in the food service industry at one point in their lives. Even those who have not end up hearing stories about supervisors docking a server’s pay when customers skip out on the bill.
The subject of this article is on tip share/tip pooling schemes that are often in place at restaurants. First, I’ll discuss the law generally. Second, this article will cover common problems that we hear from potential clients when they call in. Finally, I will provide some resources if you suspect your wages and tips are being stolen from you.
While this article will restrict itself to federal law, most of what is discussed can also apply to states with their own minimum wage and overtime laws — such as Arkansas. There can be nuances that vary from state to state so please keep that in mind.
1) Minimum Wage & Overtime for Tipped Employees
Every single employee is entitled to a minimum hourly wage for the work they performed on behalf of their employer. Most — but not all — are also entitled to a higher wage if they work over forty hours per week. At the federal level, the statute outlining these civil rights is the Fair Labor Standards Act (“FLSA” for short).
Ordinarily, employees must be paid a single minimum hourly wage which sits at $7.25/hour as of this writing. However, tipped employees can be paid only $2.13/hour; employees who “customarily and regularly” receive over $30 in tips per week are considered tipped employees within the meaning of the FLSA. This practice is most common in the restaurant industry. Tipped employees in that context are usually servers, hostesses, bartenders, and bus boys.
The reasoning for the lower hourly wage is that tipped employees earn a sort of commission from patrons who leave tips. While deeply unequitable, tipping culture is prominent throughout the American restaurant industry and diners expect to have a measure of control over their experience through tipping. While some restaurants have moved away from tipping, most full-service restaurants still expect patrons to leave tips for their servers as part of the experience.
Tip Credit Generally
Employees who are paid $2.13/hour as tipped employees are still entitled to minimum wage. The difference is that employers receive a tip credit toward their minimum wage requirement. Specifically, they receive a credit of $5.12 per hour you work because you receive tips as a customary part of your work.
Why does this nuance matter? It matters because employers can lose that credit if they act illegally. In such a situation, the employee would be entitled to backpay for those hours. Claiming a tip credit is a privilege employers receive under the FLSA because their employees receive tips regularly; that privilege can be revoked if they do not comply with the FLSA’s requirements.
Tip Sharing & Pooling
Tip pools, also referred to as tip sharing, are schemes set up where some portion of a tipped employees tips are set aside in a pool to be divided up evenly at some point in the future. The FLSA requires this point to be on a regular payday, but employers have some leeway if the payout amount cannot be determined until after payday — such as if credit card transactions do not clear immediately. This often occurs when employees are paid weekly.
The FLSA does not require a minimum tip contribution or set a maximum amount for a tip pool. Based on my conversations with potential clients, most employers limit tip pools to 20% of all tips but this may vary based on region and customary practice within the industry.
The FLSA does make it illegal to include two classes of employees in a tip pool. First, employees who are not tipped employees cannot be included if the tipped employees are being paid $2.13/ hour. This means that dishwashers, cooks, security, and anyone else in a position making over $2.13/hour cannot be part of the tip pool. Second, the business itself or its managers, supervisors, and owners can never be included in tip pools.
“Managers and supervisors” refers to any employee:
1) whose primary duty is managing the business or a customarily recognized department (such as Front-of-House);
2) who customarily and regularly directs the work of at least two or more other full-time employees; and
3) who has the authority to hire or fire other employees, or whose suggestions and recommendations regarding the hiring or firing are given particular weight.
Business owners who own at least 20% of the business in which they are employed and who are actively engaged in its management are also managers and supervisors who may not keep employees’ tips.
Recordkeeping re: Tip Pools
An employer that pays its tipped employees $2.13/hour must keep records of 1) each employee whose wage is determined in part by tips, 2) the weekly or monthly amount reported by the employee to the employer of tips received, 3) the amount the tipped employee actually makes per hour including tips; 4) number of hours worked each workday in any occupation in which the employee does not receive tips and total daily or weekly straight-time payment made by the employer for such hours, and 5) hours worked each workday in occupations in which the employee receives tips and total daily or weekly straight-time earnings for such hours.
2) Common Illegal Situations in the Restaurant Industry
Situation One: Tip Pool Deductions for Unpaid Checks
This is the quintessential illegal act under the FLSA regarding servers. A customer orders food, drinks, and dessert only to leave the establishment without paying. The business — through a supervisor or owner — tells the server he or she is responsible for the loss of money on the meal. If they are “generous,” they only deduct the cost of the meal rather than the retail price. Often, this practice is the real motivation behind establishing a tip pooling scheme. It’s hard to recoup costs when there is no pot of money to pull money from.
This is NEVER permissible. Employers know this but continue to do so because employees often need their job. This is wage theft – pure and simple.
The only allowed tip deduction is for credit card processing fees. If your employer is charged 3% on every credit card transaction, they can pass along that fee to you for your tips only. They cannot deduct the processing fees for entire meals from your tips.
Situation Two: Managers & Supervisors Included in Tip Pooling
Often, managers and supervisors also perform tipped work, such as bartending and serving. It isn’t uncommon for smaller restaurants to have tipped employees who wear multiple hats like this. The question is: is this employee a “tipped employee” or a manager/supervisor?
The answer is that in the context of tip pools, they are always managers. They cannot be included in tip pools even if they performed substantial tipped work. They can keep the tips they receive directly for their work like any other employee but they cannot be included in a tip pool.
Situation Three: Back-of-House Included in Tip Pooling
Just like managers, including employees such as cooks, dishwashers, and anyone else who does not “customarily and regularly” receive tips from customers cannot be included in a tip pool. These employees are paid a higher hourly wage because they do not receive tips. It is patently unfair — and illegal — to include them in tip pools.
The exception to this if you receive a full $7.25/hour plus tips. In that situation where your employer doesn’t receive a tip credit because they pay you $2.13/hour, including cooks and other employees like that is allowed. The exception makes some sense: there’s no unfairness if you all receive over minimum wage directly from your employers.
Situation Four: Tip-Only Positions with No Hourly Wage
Some employers try to have employees work only for tips and do not even pay $2.13/hour. Their reasoning is usually something to the effect of: what’s the difference between a commission-only sales job and working strictly for tips? While I understand that viewpoint, it is still illegal.
As mentioned above, tipped employees are entitled to minimum wage as a civil right. Employers have the privilege of claiming a portion of that hourly wage as a tip credit for a specific class of employees. The tip credit is only $5.13/hour. It is not $7.25/hour.
Situation Five: Substantial Non-Tipped Work by Tipped Employees
Tipped employees are treated differently because they “customarily and regularly” receive tips from customers. What happens if you spend most of your day doing non-tipped work, such as cleaning the bathrooms? The answer is that your employer probably owes you a full minimum wage for that time.
This area of the law is in flux so take this with a grain of salt. The U.S. Department of Labor publishes Regulations which interpret the FLSA. The Regulation dealing with this situation has changed several times over the past decade.
Right now, whether you are owed a full minimum wage for work performed beyond your normal tip-producing duties depends on the nature of the work. If the work “directly supports” your tip-producing duties and it’s done for a limited time, it is not illegal to pay you $2.13/hour. Common examples would be wiping down tables, answering phones from customers calling in, prepping garnishes for alcoholic drinks, filling ice buckets, and so forth.
Right now, the cut-off for “limited time” is either a) 20% of your time worked per week or b) thirty (30) continuous minutes. If you spend more than 20% of your workweek (i.e. 8 hours out of 40) or thirty continuous minutes doing side-work, you are entitled to your full minimum wage even if the work “directly supports” your tip-producing duties.
If your directly supporting work is longer than thirty minutes, you are entitled to $7.25/hour for any time after the initial thirty minutes. If the directly supporting work is over 20% of your workweek, you are entitled to minimum wage for all time doing said work.
Most importantly, any work that isn’t “tip-producing” or “directly supports” said tip-producing work must be paid a full minimum wage rather than $2.13/hour. This means that if you are cleaning bathrooms, helping with dishes in the kitchen, or doing inventory, your wages are likely being stolen.
Keep in mind that even illegal acts like this are still subject to what’s known as the de minimis rule. Essentially, employers cannot be sued for small violations. If you were asked to wash dishes for five minutes one time two years ago, you likely do no have a claim against your employer despite having approximately $0.42 stolen from you.
But if your employer habitually has you cleaning the bathrooms or doing inventory despite being a tipped employee, you are likely paying for the privilege in stolen wages.
3) So, What Can I Do?
Your available remedies will vary based on your situation. First, the statute of limitations for wage theft under the FLSA is two or three years, depending on the circumstances. If you worked somewhere that stole your tips five years ago, you likely do not have the ability to recover.
Second, what you can recover depends on the nature of the theft.
- If your employer stole your tips, you are likely entitled to both your unpaid tips and the difference between your tipped wage ($2.13/hour) and minimum wage ($7.25/hour) for some or all of your time working there.
- If you were required to perform directly supporting non-tipped work for longer than thirty minutes or over 20% of the workweek, you would be entitled to an additional $5.12 for each applicable hour.
- If you were required to perform work totally unrelated to your tipped job — such as cleaning the bathrooms as a server — then you would be entitled to an additional $5.12/hour for all time performing said work, provided it isn’t de minimis.
Finally, you may be entitled to liquidated damages which would be effectively double your unpaid wages. Congress added this additional remedy to a) compensate you for lost opportunities tied to your stolen wages and b) to encourage compliance with the FLSA’s minimum wage and overtime protections.
Conclusion & Additional Resources
If you suspect your wages are being stolen, reaching out to the U.S. Department of Labor’s Wage & Hour Division would be a good start. They routinely help employees who are the victims of wage theft.
You may also hire a private attorney such as myself. The FLSA requires employers to pay an employee’s reasonable attorneys’ fees if they prevail so we routinely handle this cases on a contingency basis — meaning victimized employees would pay no legal fees upfront.
If you’re interested in learning more about your rights and whether you are being victimized by your employer, please reach out to Evelyn Burrows, our Client Services Director, at firstname.lastname@example.org or (903) 221-9180. She will get the details of your situation and forward them to me for evaluation.