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The Creation Implementation And Maintenance Of A Valid Tip Pool

by | Apr 11, 2018 | Employment Law

Federal and state wage and hour laws are fairly complex and can be quite confusing. These regulations become even more confusing when tips are involved. It’s not surprising, therefore, that industries employing tipped employees are fertile ground for wage and hour claims. It is important for employers to understand the laws around tip credit and how to create a valid tip pool.

The ‘Tip Credit’ Basics:

Tips are used by certain employers to cover the difference between a tipped employee’s minimum cash wage (i.e. $2.13/hour federal; $2.33/hour in Wisconsin; $4.95/hour in Illinois) and the minimum wage requirements (i.e. $7.25/hour federal; $7.25/hour in Wisconsin; $8.25/hour in Illinois). The difference between the minimum cash wage and the minimum wage is called the “tip credit,” as it is a credit against the employer’s obligation to pay its employees minimum wage.

An employer wishing to utilize the tip credit must provide certain information to its employees prior to taking the tip credit. This information includes: (i) amount of the cash wage to be paid to the employee (i.e. at least $2.33 in WI or $4.95 in IL); (ii) amount the employer is claiming as the tip credit (i.e., difference between cash wage and minimum wage requirement); (iii) statement that the tip credit will not be more than the tips actually received by the employee; (iv) statement that the tips received by the employee belong to the employee (with the exception of the tip pool – described in detail, below); and (v) statement that the employer will not apply the tip credit to an employee’s wages unless the employee has been advised of these tip credit rules. This information may be provided to the employee verbally or in writing. It is best practice, however, to provide this information in writing whether through written policy, employee handbook or an alternative document that requires the employee’s affirmative acknowledgment that they have received this information.

In many cases, tipped employees receive tips directly from the customers they serve. The employees then report their tips to the employer and to the appropriate governmental agencies. In other cases, however, tipped employees contribute to a “pool” where the tips are then split or disbursed amongst the other tipped employees. This is referred to as a “tip pool,” and can cause significant legal issues if not done correctly.

Creating A Valid “Tip Pool”

Wisconsin and Illinois employers may require their tipped employees to contribute to a valid tip pool. The tip pool may only be required, however, for those employees who customarily and regularly receive tips. Some examples of this category of employees include, but are not limited to, servers, waiters, bellhops, waitresses, countermen, busboys, service bartenders, barbacks, etc. It is imperative that employers exclude from the tip pool any employee who does not customarily and regularly receive tips. Some examples of this category of employees include, but are not necessarily limited to, managers, supervisors, cooks, chefs, janitors, dishwashers, laundry room attendants, etc. An employer who includes an employee within the tip pool who does not customarily and regularly receive tips runs the grave risk of having its tip pool invalidated.

To further confuse matters, there are instances in which an employee performs dual roles; that is, he/she may perform the duties of a tipped employee during portions of his/her shift and at the same time perform duties of a non-tipped employee. In this situation, the employer may consider the employee a tipped employee for only those hours he/she spends working in the tipped occupation. The employer may take the tip credit for these hours worked. The employer also may take the tip credit where the tipped employee spends some time performing non-tipped activities such as cleaning, setting tables, making coffee, occasionally washing dishes or glasses. However, if the employee spends more than 20% of his/her time performing non-tipped work, no credit may be taken for the time spent performing those duties.

In the event, you have questions regarding the creation, implementation or maintenance of a valid tip pool, or have questions about the tip credit generally, contact the experienced attorneys at McDonald & Kloth, LLC.