Why Employees Must Be Paid Full Minimum Wage When Tip Sharing/Tip Pooling is Required

Tip sharing or tip pooling is generally viewed as a fair and equitable system for distributing tips among employees. It ensures that everyone who contributes to the customer’s experience is rewarded fairly, from waitstaff to dishwashers and bartenders. However, it’s essential to remember that shared/pooled tips cannot be used to offset an employee’s hourly wage. In other words, if an employer requires employees to participate in tip-sharing, they must pay them at least minimum wage – without assuming tip income.When they don’t do tip sharing, the employee usually is paid half of the minimum wage as a base and their tipped income makes up the difference.  If the tip income isn’t enough to get the employee up to the full minimum wage, then the employer has to make up the difference.

The reason for this is that wages and tips are two distinct sources of income, each with specific regulations and requirements. While tips are subject to fluctuations based on customer spending habits, wages are set by law. When an employer requires employees to participate in tip-pooling, they are asking their staff to share in the responsibility of securing tips for everyone’s benefit. As such, employers must assume the responsibility of ensuring that their employees receive at least the minimum wage hourly rate when tipping income doesn’t add up to full minimum wage.

It is important to note that failing to pay employees at least full minimum wage when tip-sharing rules are in effect can result in serious legal consequences. According to the Fair Labor Standards Act (FLSA), the Federal minimum wage is $7.25 per hour – but for workers who receive tips, that amount can be lower, as low as $2.13 an hour. However, if an employer requires employees to participate in tip-sharing and does not pay them the remaining amount of the minimum wage if their tips aren’t enough, the employer is violating the law. Employees can file a complaint with the Department of Labor, which can result in legal action against the employer.

In addition to legal penalties, failing to pay employees the full minimum wage when tip-sharing rules are in effect, can also result in long-term financial costs to the employer. Many States have significantly raised their minimum wage rates in recent years, and thus failing to provide employees with the full minimum wage amount due can result in sizable amounts paid in back pay with interest payment. Additionally, the risk of claims from former employees who may seek to use the current legal landscape as an opportunity to make claims due to underpaid wages, especially if tip-sharing is involved.

Requiring employees to participate in tip-sharing or tip pooling is a common practice in the restaurant industry. Still, restaurant owners must ensure their employees are paid the full minimum wage if they participate in these programs. While tip-sharing can be an effective way to ensure all employees are fairly compensated, employers must adhere to the FLSA regulations by making up for any shortfall from an employee’s hourly wage or the minimum wage rate in their respective State. If you’re a restaurant owner with a tip-sharing program, ensure you consult with your payroll provider to avoid legal and financial penalties and ensure you’re operating in accordance with the law. 

If you’re not outsourcing your payroll, consider doing so to help you save time and ensure compliance.  UKG Ready’s Tip Sharing/Tip Pooling feature (through APlus Payroll) helps you make sure that workers are fairly compensated for their efforts. With this solution, you can set up rules-based tip pooling to ensure tips are both collected and distributed accurately among all team members according to pre-defined criteria. You also have the flexibility to adjust payroll needs based on additional manual tip distributions, as well as enable employees to view their respective contributions and allocations. This means less time spent on administrative tasks, freeing up more time to focus on the important work you do.

At APlus Payroll, we have the expertise to help you navigate tip pooling regulations, tax reporting requirements, and more. We make sure you stay compliant so you can focus on running and building  your business.