Tip Pooling vs Tip Credit: What is the Difference?

It is crucial for employees to know and understand their rights, especially employees working in the restaurant and hospitality industries. If you think your employer has been violating your legal rights as an employee, you need to seek counsel from lawyers like those at Herrmann Law, who are dedicated to vindicating the rights of employees.

Restaurant Servers and Workers

If you receive tips and gratuities as part of your earnings, one of the more confusing aspects of employment law is the difference between a “tip credit” and a “tip sharing” or “tip pooling” arrangement. Legally, the concepts are similar and interrelated under federal and state labor laws.

What is a “Tip Credit?”

Legally, a “tip credit” is a provision under federal law that allows an employer to use tips to satisfy its minimum wage obligation. For now, the federal minimum wage is $7.25 an hour. Many states and localities have established higher minimum wages. Federal labor rules and regulations, and most states, allow employers to take a “credit” against the obligation to pay minimum wage if an employee receives tips. That is, tips received by the employee are a “credit” against the minimum wage obligation. Currently, the maximum amount under federal law that can be used as a tip credit is $5.12.

An employer must always ensure that an employee receives the minimum wage. Using the federal minimum wage, if tips received are greater than $5.12 per hour, then the employer can take the maximum credit and pay the tipped employee an additional cash wage $2.13 an hour. In combination, the employee receives at least the $7.25 minimum wage.

As indicated, many states have enacted statutes to modify how much tip credit employers can use. For example, Arizona allows a tip credit of $3.00 and its current minimum wage is $11.00. Thus, if the entire tip credit is used, Arizona employers must pay at least $8.00 as a cash wage. Some states — like California and Minnesota — have disallowed tip credits entirely.

What is “Tip Pooling?”

Tip pooling relates to sharing tips among certain categories of employees. Sometimes, the pooling arrangement is only shared among traditionally tipped employees like waitstaff—servers and bartenders. One of the ideas of tip pooling is to “even out” the tips to encourage “team spirit” and discourage individuals from tip “hustling.”

Federal labor laws allow employers to establish mandatory tip pooling arrangements, but certain persons are always excluded.

How Does the Tip Credit Relate to Tip Pooling?

As noted, although tip credits and tip pooling are different concepts, legally, there is a connection. In simple terms, an employer can use the tip credit AND a tip pooling arrangement ONLY if the pooling includes traditionally-tipped employees. However, if an employer wants to mandate tip pooling that includes non-traditionally tipped employees, then an employer CANNOT take advantage of the tip credit with respect to its obligation to pay minimum wage.

In other words, if you are paid less than minimum wage, it is a violation of federal law for your employer to use tips from the tip pool to pay any non-tipped workers including the cooks, dishwashers, back-of-the house, management, any position that does not have frequent customer interaction. The idea being that employers should bear the expense of compensating management and back-of-the-house staff from the employer’s own pocket.

Recovering Compensation for Tip Pool Violations

When an employer requires its tipped employees (i.e. servers and bartenders) to shoulder any of the burden of compensating management or back-of-the-house staff, the employer violates the federal wage laws, including the federal tip credit and tip pooling laws. If an employer violates the federal tip credit or tip pooling laws, the employer owes its tipped employees the full minimum wage for each hour worked during the previous 3 years, plus all misappropriated tips, liquidated damages, and is responsible for paying the employee’s attorneys’ fees and costs.

To illustrate, where an employer has violated the federal tip credit or tip pooling laws, the employer must pay each affected server and bartender $5.12 for each hour worked during the past three (3) years. [$5.12 per hour is derived by subtracting the minimum tipped wage ($2.13 under federal law) from the full minimum wage ($7.25 under federal law)]. In addition, the employer must return all misappropriated tips. The employer must also pay liquidated damages (i.e. double damages)—an additional amount equal to the $5.12 per hour plus all misappropriated tips. Finally, the employer is also responsible for paying for the employee’s attorneys’ fees and costs.

Call the Employee Rights Attorneys at Herrmann Law Today

If you think that your employer has engaged in violations of your rights as an employee, call the Employee Rights attorneys at Herrmann Law. We are proven, experienced, employee-focused attorneys representing workers across the United States in all types of workplace disputes. Use our Online Contact page or call us at (817) 479-9229.