Is Your Tip Pool a Potential Lawsuit?

Navigating tip pool laws can be tricky.
Navigating tip pool laws can be tricky. Thinkstock

Not understanding federal and state tip pool guidelines can lead to legal troubles

Tip pooling is common in the restaurant industry. However, many employers do not realize that mandatory tip pools are highly regulated by federal and state law. Some state laws go so far as to completely prohibit employer mandated tip pooling. Although employers must carefully consider state laws on tip pooling, this article is focused on federal law.

Under the Fair Labor Standards Act (FLSA), mandatory tip pools may only include employees who “customarily and regularly receive tips.” Although this concept may appear simple, it is not. Employers, employees, and the courts have grappled with it recently, and this struggle has resulted in multimillion dollar class action lawsuits that have required employers to restructure how their employees get paid.

At the outset, I want to note that this article is not intended to provide a comprehensive overview of the legality of tip pools. Instead, this article is meant to make employers aware of one way in which tip pools have been challenged in recent years. 

The Basics of Tip Pools

The FLSA requires employers to pay a minimum wage of $7.25 per hour to employees. However, an employer need only pay $2.13 per hour to “tipped employees,” which is defined as employees who “customarily and regularly” receive more than $30 per month in tips, though some states have laws regarding which employees may be classified as tipped. Further, an employer may require tipped employees to contribute a portion of their tips to a tip pool so long as all of the employees in the tip pool “customarily and regularly” receive tips. If a tip pool includes employees who do not customarily and regularly receive tips, employers are required to pay all employees in that tip pool the minimum wage of $7.25 per hour.

The original guidance on which positions “customarily and regularly” receive tips said that waiters/waitresses, bellhops, counter personnel who serve customers, busboys/busgirls, and service bartenders are examples of employees who fall under that definition. These positions were contrasted with non-tipped positions, such as janitors, dishwashers, chefs or cooks, and laundry room attendants. Broadly speaking, this guidance advised that “front of house” employees could be included in a tip pool, not “back of house” employees.

The Lawsuits

Although tip pools were the subject of litigation in the past, challenges to the inclusion of employees who arguably did not customarily and regularly receive tips began in the late 1990s and gained momentum in the 2000s. In these lawsuits, employees argued that their employers failed to pay them minimum wage because of an “invalid tip pool,” i.e., a tip pool that included employees who worked in positions that did not customarily and regularly receive tips. Although busboys were listed as an example of a “tipped employee” in the original guidance, they are commonly challenged in these lawsuits as not belonging to a valid tip pool. The reason for this is that the employee’s position title is not dispositive. Instead, courts analyze the duties of employees to determine if they customarily and regularly received tips.

The Customer Interaction and Duties Analysis

Perhaps the most famous tip pool case involved hosts at Outback Steakhouse in Kilgore v. Outback Steakhouse of Florida Inc. In that case, the hosts greeted customers, handed out menus, walked customers to their tables, passed out appetizers to customers, cleared dishes from tables, and filled water glasses. Based on these duties, the court found that the hosts customarily and regularly received tips because they had more than de minimis contact with the customers. After this case was decided, many other courts found its reasoning persuasive. As a result, courts analyzing whether an employee customarily and regularly received tips asked two primary questions: (1) are the employees’ duties more like front-of--house or back-of--house positions? and (2) how much contact do the employees have with customers? These questions are clearly interrelated because employees who perform front-of-house duties typically have more contact with customers.

How do you know if an employee may be included in a tip pool? As mentioned above, the amount of time an employee directly interacts with customers is the most important factor. Nevertheless, courts have identified certain duties that can be helpful to determine if a position may be included in a tip pool. In particular, courts have typically classified duties as follows:

  • Front-of-House: serving food and drinks to tables, greeting customers, taking orders, checking with customers to ensure that they are satisfied with their meals, and refilling beverages.
  • Back-of-House: assisting cooks with dish preparation, cleaning tables before and after a restaurant opens, making coffee, washing dishes, and restocking stations.

Although this list is not comprehensive, it is a good place to start for employers who may have concerns about their tip pools. If a tip pool includes employees who regularly perform back-of-house duties and do not often interact with customers, the employer could be at risk for a potential legal challenge.

As these lawsuits continue to produce significant settlements and media attention, employers need to critically review the employees included in their tip pools. With technology continuing to shape our lives and lawsuits, it is plausible that an employee’s Facebook complaint about a tip pool could signal the beginning of a class action lawsuit.  If a tip pool includes employees who perform mostly back-of--house duties without much customer interaction, it would be prudent for the employer to contact an attorney who practices employment law to help evaluate the tip-pooling practices.  

Greg H. Greubel

Greg Greubel is an Associate at Littler Mendelson’s Philadelphia office. He advises and represents employers in a wide range of labor and employment matters.

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