Everything You Ever Wanted To Know About Tips, Tip Pools and Gratuities

I get a lot of questions about the legality of various tipping situations and, quite honestly, I don’t have very many answers. This blog post was written by an honest to goodness labor and employment lawyer and he has answers, my friends. I hope you will find this useful and I also hope you will share it so everyone who works in a restaurant will know what can and cannot be done when it comes to their tips.  -BW

Seriously: Can My Employer Legally Do That?

If the federal minimum wage is $7.25 per hour, then how do some employers (specifically, restaurants) get away with paying employees less – in some cases as little as $2.13 per hour? You may be thinking, well I earn more than $7.25 after accounting for the tips I receive. This is probably true; however, your employer is still paying you less than $7.25 per hour. Those tips aren’t coming from your employer’s pocket, but are earned by you for the service you provided to your customers. However, there is a section within the minimum wage law that allows an employer to take a “credit” for the tips an employee receives against the $7.25 per hour minimum wage.

This law – known as the “tip credit – is rather complex and rigid in application. If an employer violates – accidentally or intentionally – the tip credit, then the employer is disavowed from using the tip credit and must pay the employee back wages at the full minimum wage, which can be a significant sum, especially for servers who are often paid as little as $2.13 per hour. There are countless ways that employers violate the tip-credit, thereby depriving employees of a fair day’s pay for a fair day’s work.

I am now going to list of what I call “illegal tipping practices” that I frequently see being employed by restaurants.

Whose Tip is it?

First and foremost, any tip that an employee receives from a customer, belongs to the employee and the employer is prohibited from sharing in these tips, with a single exception. The one exception being, an employer may deduct the actual cost to process a credit card tip, but nothing more. To illustrate, I recently obtained a sizable settlement for a group of servers working at a restaurant that was deducting a 5% credit card processing fee for tips; however, as it turns out, the restaurant’s credit card processing fee was only 3%. This extra deduction resulted in a large settlement to my clients. The important thing to keep in mind here, is tips belong solely to the server, and the employer may not share or skim from a server’s tips, save an except the actual cost of the credit processing fee.

Are Mandatory Tip Pools Legal?

I am also often asked about mandatory tip pools. An employer can require employees to share their tips; however, not all tip pools are legal. In this context, there are heaps of legal issues that an employee should look out for. First, an employee cannot be forced to share tips or contribute to a tip pool where the owners, the chef, dishwasher, or managers are sharing in the tip pool. Yes, if you are required to share your tips with the chef, dishwasher, or a manager, then this is an illegal tip pool; your employer is violating the federal wage laws.

One issue that often arises is employees aren’t sure who is sharing in the tip-out of a tip pool. I recently obtained a settlement from a restaurant where the servers discovered the employer was skimming the tip pool by talking to the hosts and bartenders, wherein they were tipped-off (excuse the pun) that the tip-out was too low, meaning some of the tipped pool was going elsewhere.  As it turns out in that case, the owners and managers were skimming funds from the tip pool for themselves. The practice of owners or managers skimming money from tip pool or failing to redistribute the entire amount of tip pool is illegal.

Can My Employer Make Deductions from My Wages or Tips?

I also get lots of questions about deductions or whether an employer can require employees to pay for certain items. As a general matter, if you are paid less than $7.25 per hour (i.e. a tipped employee), an employer is probably violating the law if he or she makes any deductions from your wages or tips other than deductions for taxes or credit card fees. For instance, if an employer requires tipped employees to pay for broken glasses (glass breakage fee), returned food items, uniforms, etc., then the employer is violating the federal wage laws.

Can My Employer Keep Gratuities?

Last, there is often a lot of confusion by employers and employees alike regarding the payment of gratuities versus tips. Yes, there is a difference between a gratuity and a tip. A “gratuity” is something that is mandatory and is not subject to negotiation. The principal example of a gratuity is a required charge of 20% for tables of six or more people. Whereas a “tip” is something that is completely left up to the discretion of the customer; the obvious example being cash left on the table or money voluntarily added to the bill by the customer.

The difference between a tip and a gratuity is important because a tip (see above) belongs to the employee. However, a gratuity legally belongs to the employer-restaurant. In other words, if you work a banquet, and the customer is paying your employer a mandatory, fixed amount service charge as part of the cost of the banquet, this gratuity does not have to be redistributed to the employees. However, if you are not earning “tips” during the time you worked the banquet, then your employer cannot use the tip-credit and must be paying you at least the full minimum wage for the hours your worked.  This remains true even if your employer elects to distribute the gratuities to you – you still must be paid the full minimum wage before accounting for any gratuities received.

Conclusion

In sum, servers are often the most taken advantage of group in terms of wages. However, the good news is that there are strict laws protecting servers. If you are receiving tips as part of your pay and you have questions about your employer’s policies, you should reach out to an attorney to discuss. I find that restaurants are some of the most common violators of the wage laws. You can also look at my blog, where you may find the answer to your questions http://paycheckcollector.com/blog/

Article By:

 

Drew N. Herrmann

Herrmann Law, PLLC

777 Main Street, Suite 600

Fort Worth, Texas 76102

Phone: 817-479-9229

www.paycheckcollector.com

 

*Drew N. Herrmann is a labor and employment lawyer licensed to practice in Texas. Mr. Herrmann’s labor and employment law practice is devoted to representing aggrieved employees in workplace disputes.  If you have any questions or want to consult with Mr. Herrmann, he can be reached by calling 817-479-9229, or emailing drew@herrmannlaw.com or check out his website www.paycheckcollector.com

 

This article is not legal advice. The information contained in this article is informational and you should not rely on it instead of legal advice specific to your situation. Drew N. Herrmann is licensed to practice law in Texas. The law in your state may be different than what is discussed in this article. Further, the law in your state may change the analysis or outcome of the f described in this article.

The information on this website does not create an attorney-client relationship. Any information submitted through the website does not create an attorney-client relationship with Herrmann Law, PLLC. Further, Herrmann Law, PLLC does not guarantee the accuracy of any article published on this website.

16 thoughts on “Everything You Ever Wanted To Know About Tips, Tip Pools and Gratuities

  1. Lisa

    I was part of a tip pool where we were assigned “shares” – more experienced servers were “10 shares” and less experienced were rated 9, 8 and 7. Always wondered if it was legal.

    Reply
  2. Wing

    So my tip out at the end of my shift is 3% of sale, which 1% goes to bartender, 1% to hibachi chef (I work at a Japanese restaurant), and 1% to I think sushi chefs and such. Host/ hostesses get no tip out whatsoever. Granted the tip out isn’t traumatic, the distribution is still illegal right?

    Reply
  3. Kenzie

    If I am reading this correctly then host/hostesses who make above the federal minimum wage, ($8.25+ per hour) should not be sharing in the tip pool or getting a tip out?

    Reply
  4. Nance

    It’s a great post, though! Reminded me to revisit the department of labor website to see if anything has changed. Thanks Bitchy!

    Reply
  5. Jerry Brown

    So a tipped employee in Texas ($2.13/hr) is not responsible for uniform costs because they make below the minimum and tips are solely the possession of the employer?

    But also…if tips are solely the ownership of the recipient, how is tipout (to bussers, hosts, bartenders, etc.) in any way permissible?

    Reply
      1. Jerry Brown

        Yes, I read that. However, if this is true: “any tip that an employee receives from a customer, belongs to the employee and the employer is prohibited from sharing in these tips, with a single exception. The one exception being, an employer may deduct the actual cost to process a credit card tip, but nothing more,” then how can it also be true that an employee has to share his/her tips with other employees in lieu of the company properly compensating them?

        Reply
  6. Jody

    When I pay for a meal by credit card, I’ve always tried to tip in cash just so the server doesn’t get dinged by a credit card fee and gets the entire amount. I always thought that was just my personal quirk and now I see it’s real. I also write “cash” on the tip line before signing for the charge, so the waiter doesn’t think I stiffed him/her and so that nobody can add anything.

    Reply
  7. Rob Del

    This is a typical but ever evolving fear of restaurant industry staff. Throughout my 18-year career I’ve seen my industry change and adjust to growing pressure to become compliant with existing laws, as well as adapting to laws focused on hospitality labor and ways of doing business. It’s no longer the wild west, in fact the industry is moving more into the bright lights of recognition, both front of the house AND back of the house. These changes are both exciting and scary. As the celebrity status of certain locations, bartenders, owners, and chefs increases so does the success of our industry as a whole. However, what appears to be happening is EVERYone is becoming a critic. This means the game has changed, creating an emphasis on performing excellent service in ways never seen before.

    This leads to what I’ve become in the industry. Through my history as a manager I’ve always understood my roots and employees side of the industry, while maintaining the professionalism required to keep the location compliant with SLA, Dept of Labor, and IRS. As a consultant, I urge owners and managers to be compliant and not try to take short cuts. Owners of bars, restaurants, catering companies, etc have too much to lose by not paying their share of payroll taxes. Therefore, to the displeasure of their staff, they must accurately report what employees are making both hourly AND in tips. It’s not to hurt the tipped employees, but it’s to protect from an audit. I use this mindset through my consulting career to help owners and managers, train staff, and now to train the next generation. I’ve recently taken over a 27-year-old company (1-800-BARTEND) which teaches people how to properly bartend in the industry. I teach a B.A.R. Certification program that has been approved by the NY State Liquor Authority, and offer an ATAP certification to those who complete the program. My goal is to help the industry understand the right way to not only provide exceptional service, but also provide that service in a professional responsible manner. I serve the Long Island and Metro New York City area with 4 locations. Please visit: 1800bartendingschool.com for consulting help or to become ATAP certified.

    Reply
    1. Drew N. Herrmann

      Rob –

      I agree with your analysis. Oftentimes, restaurant owners/managers are working through these issues blindly, not knowing whether it’s against the law. I do not represent many employers, but never hesitate to post articles or do speaking engagements with employers to educate managers/owners on the laws; saving the employer the cost of a lawsuit and saving employees the hassle of filing a lawsuit to get what the law entitles them. Education is key, just hopefully the education occurs before a lawsuit is filed.

      Regards,

      Drew N. Herrmann

      Reply
  8. Who'sAsking?

    So, I work for a chain, and the managers want $10 for an apron cash, that’s probably just them trying to get $10, yeah?
    I’ve contemplated doing it and asking for a receipt to see what they say, but don’t really want to waste the $.

    Reply
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