Employers use tip pooling arrangements to distribute tips an employee receives among the employer’s various other employees. Frequently, employers create tip pooling arrangements where the employer requires the tipped employee, such as a waiter or bartender, to place a portion of tips received into a pool which is then distributed to non-tipped employees, such as dishwashers and cooks. Some employers even take a portion of these tips for management or to distribute to independent contractors, such as DJs, bouncers or dancers.
Are these types of arrangements legal, in other words, can an employee be required to participate in a tip pooling arrangement?
The answer depends on the law in effect in the state that the employee works. On April 5, 2011 the Department of Labor issued regulations which state that all tips received by an employee are the property of the employee. These regulations clarify the 9th Circuit Court of Appeals decision which found that tips received by an employee are the employee’s property except in cases where there is a tip pooling arrangement. In that instance, the tips that are subject to the pooling arrangement were not the employee’s property.
The new regulations specifically state that all tips that an employee receives are an employee’s property with no exceptions. The employer may require an employee to participate in a valid tip pooling arrangement or take a credit against minimum wage, but only if the state in which the employee is employed allows such an arrangement or credit.
Each state has different requirements for a tip pooling arrangement. In Oregon, tip credits against minimum wage are not allowed. Additionally, tip pooling arrangements must be in writing, provided to the employee at the commencement of employment, and posted in a conspicuous place. Management and ownership cannot receive any of the pooled tips. If management or ownership received any of the pooled tips, the employer would be taking a tip credit which is not allowed under Oregon law.
For example, a bar pays its servers and bartenders minimum wage. The bar manager takes 20 percent of the tips received by the bartenders and servers and places the tips into a pool to be redistributed. The manager or owner cannot receive any of the funds contributed to the tip pool. If the manager or owner did receive funds from the tip pool, then the manager would be taking a tip credit against minimum wage and violating Oregon’s minimum wage laws and the Fair Labor Standards Act (FLSA).
Additionally, the tip pool can only include employees that are “customarily and regularly” tipped employees. If the tip pool includes cooks, dishwashers or other employees who are not customarily or regularly tipped then the tip pool is invalid. Additionally, the funds in the tip pool cannot be distributed to independent contractors, such as bouncers, DJs or dancers, since they are not employees.
Failure to comply with the FLSA and Oregon law may result in the employer having to pay back wages, penalties for failing to pay wages, and the employee’s attorney fees. In addition, the employee may have a claim for conversion which could carry punitive damages if the employer’s conduct is egregious.