The Treatment of Tips under the FLSA: Tip Pooling

The FLSA provides for tip pooling—employees’ contributing their tips to a general pool which is then shared by other employees.  29 U.S.C. § 203(m); see also 29 C.F.R. § 531.54.  Management can require employees to participate in a tip pool; but, if it does so, it must inform the employees of the FLSA’s tip pooling provisions.  Kilgore v. Outback Steakhouse, 160 F.3d 294, 303-04 (6th Cir. 1998) (holding that Outback was permitted to require its waiters to pool tips with hosts).  Cf. Leighton v. Old Heidelberg, Ltd., 219 Cal. App. 3d 1062 (Cal. Ct. App. Apr. 24, 1990) (holding that a mandatory tip pooling policy was not prohibited by California statute, promoted fairness, and ensured an equitable distribution of tips).  Tip pooling differs from tip sharing.  Tip sharing occurs when an employee earning tips voluntarily shares them with other employees.  For example, a waiter voluntarily splitting his tips with a busboy/girl and bartender constitutes tip sharing.  There are no regulations relating to voluntary tip sharing between employees.  Rousell v. Brinker International, Inc., 2008 U.S. Dist. LEXIS 52568, at *75 (S.D.Tex. July 9, 2008) (holding that employees may share tips with other workers who are not customarily and regularly tipped if they do so “free from any coercion whatever and outside any formalized arrangement or as a condition of employment”); WH Admin. Op. (Oct. 26, 1989); WH Admin. Op. (Mar. 26, 1976).

The Kilgore court explained:

Hosts at Outback are “engaged in an occupation in which they customarily and regularly receive tips” because they sufficiently interact with customers in an  industry (restaurant) where undesignated tips are common. Although the parties dispute exactly how hosts spend their time working at Outback, hosts do perform important customer service functions: they greet customers, supply them with menus, seat them at tables, and occasionally “enhance the wait.” Like bus persons, who are explicitly mentioned in 29 C.F.R. § 531.54 as an example of restaurant employees who may receive tips from tip outs by servers, hosts are not the primary customer contact but they do have more than de minimis interaction with the customers. One can distinguish hosts from restaurant employees like dishwashers, cooks, or off-hour employees like an overnight janitor who do not directly relate with customers at all. Additionally, the fact that Outback prohibits hosts from receiving tips directly from customers provides some evidence that Outback hosts work in an occupation that customarily and regularly receives tips.

160 F.3d 294, 301-302 (6th Cir. 1998) (brackets and ellipses omitted; quotations in original).

In order for mandatory tip pools to pass muster under the FLSA, they must meet the following two requirements.

1.      Participating employees must customarily and regularly receive tips, such as waiters, waitresses, bellhops, counter personnel (who serve customers), busboys/girls and service bartenders.  Only those tips that are in excess of tips used for the tip credit may be contributed to a pool.  Tipped employees cannot be required to contribute a greater percentage of their tips than is customary and reasonable.  Kilgore v. Outback Steakhouse, 160 F.3d 294, 301 (6th Cir. 1998) (holding that hosts could participate in a tip pool because they were “engaged in an occupation in which [they] customarily and regularly received tip” although they were not allowed to personally accept tips); Zhao v. Benihana, Inc., 2001 U.S. Dist. LEXIS 10678 (S.D.N.Y. May 7, 2001) (holding that a manger’s disciplining of a plaintiff-employee for violating the tip pooling agreement between the servers and the chefs indicated that management “instituted or adopted the tip sharing agreement as a matter of restaurant policy and that the tip pool was therefore not voluntary” and thus in violation of the FLSA because it was mandatory and included ineligible employees); Bonham v. Copper Cellar Corp., 476 F. Supp. 98, 101-02 (E.D. Tenn. 1979) (finding a tip pool arrangement was mandatory and, therefore, invalid because the managers urged waitresses to share 15 percent of their wages with bartenders, busboys, and kitchen personnel (non-tipped employees) and spoke personally with waitresses when they did not comply); Marshall v. Krystal Co., 467 F. Supp. 9, 13 (E.D. Tenn. 1977); Elkins v. Showcase, Inc., 704 P.2d 977, 989 (Kan. 1985).  See also Dep’t. of Labor Wage and Hour Div., Op. Ltr. 1997 DOLWH LEXIS 55, at *4 (Nov. 4, 1997) (suggesting that a tip pool is invalid when a tipped employee is required, as a condition of his or her employment, to share tips with non-tipped employee); U.S. Department of Labor Wage And Hour Division, Field Operations Handbook, 30d04(c) (1988), available at http://www.dol.gov/esa/whd/foh/index.htm.  Some courts have placed significance on whether an employee regularly interacts with customers in determining whether an employee is eligible to participate in a tip pool.  Myers v. Copper Cellar Corp., 192 F.3d 546, 550 (6th Cir. 1999) (finding that salad preparers could not participate in a tip pool because they did not have any direct contact with diners, could not be seen by patrons, and had duties akin to those classified as food preparation or kitchen support work); Elkins v. Showcase, Inc., 704 P.2d 977, 989 (Kan. 1985) (holding that bartenders who were located behind a wall had no interaction with customers were not regularly tipped employees who could participate in a tip pool arrangement and, therefore, the employer could not utilize the tip credit for those employees).  On the other hand, other courts have not placed the same significance on customer interaction and have held that employees who do not interact with customers can participate in tip pools.  Lentz v. Spanky’s Rest. II, Inc., 491 F.Supp.2d 663 (N.D. Tex. 2007) (noting that nothing in the tip credit provision requires employees who participate in a tip pool to have direct interaction with customers and holding that “expediters,” who helped prepare plates in the kitchen but did not interact with customers, could participate in the tip pool); Louie v. McCormick & Schmick Rest. Corp., 460 F. Supp. 2d 1153, 1163 (C.D. Cal. 2006) (holding that restaurants may require servers to share tips with bartenders, regardless of whether bartenders provide direct or indirect services to a particular server's customers); Etheridge v. Reins Int’l California, Inc., 172 Cal. App. 4th 908 (Cal. Ct. App. Mar. 27, 2009) (holding that employees who did not provide “direct table service” could still participate in tip pools).  See also 29 U.S.C. § 203(m) (2009) (there is no explicit requirement in the tip credit provision that employees who participate in a tip pool interact directly with customers).

2.      Management employees must not participate in the tip pool.  Morgan v. SpeakEasy, 625 F. Supp. 2d 632 (N.D. Ill. Sept. 20, 2007); Dominguez v. Don Pedro, 2007 U.S. Dist. LEXIS 6659 (N.D. Ind. Jan. 25, 2007); Chung v. New Silver Palace Rest., Inc., 246 F. Supp. 2d 220 (S.D.N.Y. 2002) (holding that defendants violated the statutory requirement that tipped employees be allowed to retain all tips received by requiring plaintiffs to share tips with individuals the court found to be employers); Ayres v. 127 Rest. Corp., 12 F. Supp. 2d 305 (S.D.N.Y. 1998) (holding that when a portion of tips went to a restaurant’s general manger through a tip pooling arrangement, the employer did not meet the FLSA’s requirement that “all tips received by an [an] employee have been retained by an employee”).

The Ninth Circuit in Misty Cumbie v. Woody Woo, Inc., 2010 U.S. App. LEXIS 3686 (Feb. 23, 2010), held that a tip pooling arrangement in which the majority of the tips were redistributed to the kitchen staff was valid under the FLSA.  Key to this decision was the fact that the employer paid the servers an hourly wage great equal or greater than the state minimum wage.  The court found the fact that the employer was not taking a “tip credit” to be the decisive factor in upholding the tip pool.  Id. at *10.

The FLSA does not mandate how tip pool contributions should be split among participating employees.  However, the Department of Labor has stated that a required tip pool contribution of more than 15% of an employee’s tips may not be valid.  Elkins v. Showcase, Inc., 704 P.2d 977, 981 (Kan. 1985) (following WH Admin. Op. (Sept. 5, 1978)).  On the other hand, the Sixth Circuit has held that there is no statutory or regulatory authority for the DOL’s position that a more than 15% contribution to tip pool is excessive.  Kilgore v. Outback Steakhouse, 160 F.3d 294 (6th Cir. 1998) (“The [c]ourt can find no statutory or regulatory authority for the Secretary’s opinion that contributions in excess of 15% of tips or 2% of daily gross sales are excessive”).  See also Dole v. Continental Cuisine, 751 F. Supp. 799 (E.D. Ark. 1990).

For purposes of tip credit and minimum wage calculations, pooled tips are considered to be the property of the employees receiving them, not the employees who contributed them to the tip pool.  29 C.F.R. §531.54. 

If an employee challenges the validity of a tip pool, the employer has the burden of proving it complies with the FLSA.  Barcellona v. Tiffany English Pub, Inc., 597 F.2d 464, 467 (5th Cir. 1979) (holding that TGI Friday’s restaurant had the burden to prove a valid tip pool arrangement upon the questioning of the waiters who believed they were being denied the statutory minimum wage).

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