Restaurant Compliance: Proper Tip Handling, Tip Pooling, and More

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IndustryInsider Insights

Summary:

  • In California, employer mandated tip pooling between front-of-house and back-of-house staff is legal.
  • Employers and managers are never allowed to collect any tips in a pooling arrangement.
  • There are several methods to structure tip pools including tipping out by percentages, hours worked, or a point system.

Last month, we hosted Marie Trimble Holvick at the Pared office to broadcast our very first segment of Pared On-Air titled “Restaurant Labor Laws and Compliance in 2019.”

This is the second of our four-part series where we review highlights from the episode based on the main topics discussed. This installment covers proper tip handling. In case you missed it, our first post was about preventing wage and hour claims.

As a restaurant operator, you probably paid close attention to the tip pool ruling signed into federal law last spring. While it was a federal ruling, state laws can still differ so it’s important to consider those nuances. In this post, we cover tipping as it relates to California restaurants.

Tip pooling: the basics

In California, it’s legal to share tips between tipped and non-tipped employees provided that employees are paid at least minimum wage for all hours worked as tip credits are not permitted. Additionally, and this is true of all 50 states, managers are forbidden from participating in tip pools.

In a valid tip pool, all tipped employees pool their tips together to be redistributed by management back to participating employees. All tips are reallocated and nothing is kept by the employer.

Who is excluded from tip pools?

Managers/Shift leaders

Managers are forbidden from participating. To clarify, a manager “is somebody who can hire, fire, recommend discipline, give certain approvals like time off. They can direct an employee’s work” says Marie. “If your shift leader is doing that work, it won’t matter what you call them under the law” Marie advises. The bottom line is that letting an employee who has authority over other employees participate in tip pooling is a risky decision.

Even if a manager pitches in and does tipped work, it’s just all in a day’s work for managers, notes Marie. “Part of their job as managers is to be able to jump in when things aren’t going well. And so if they have that manager title, if people are looking to them as a manager, if this is the person that you would still call to seek approval, that person’s a manager and they can’t get tips” Marie points out.

Contractors

If your restaurant hosts live bands, comedians, or other entities who normally do collect tips, Marie recommends that they “be totally separate from your normal process.” Contractors should collect tips separately to avoid any ambiguity.

Tip pooling: the tip-out method

As mentioned above, one way an employer can manage a tip pooling arrangement is by specifying a “tip-out” structure. Employers must decide on a system for how tips will be distributed. The following are some common guidelines:

  • Tipping out by percentage: Generally, “the people with the most contact with customers or guests get most of the money. So you’re still looking at about 80% going to front-of-house… and about 20% going to the back of the house” Marie notes as a guideline.
  • Tipping out by hours worked: Sometimes, it’s fairer to distribute tips to staff who only work during the dinner rush as opposed to food prep.
  • Tipping out by a point system: In this method, managers weight staff functions with points. For example, servers are 15 points, bussers are 5 points, dishwashers are 1 point, and so forth for all participants. Tips are pooled and then divided by the total points to determine a “per-point” value.

What about service charges and surcharges?

Service charges

Service charges are typically done in lieu of tipping and added automatically to the bill, especially for larger parties. Because these charges are automatically applied, make it known to customers ahead of time. Your menu is a great place to inform customers of this practice.

Furthermore, Marie adds, “by law, service charges actually belong to the restaurant. The drawback from the customer angle is it’s taxable. So you get your bill and you see a 20% service charge and you’re taxed on that. So customers don’t always love that, but the money belongs to the house, which means that the employer can pay it out for payroll.”

Surcharges

Surcharges, on the other hand, are added to cover something specific. For example, in San Francisco there is often a line for “S.F. Mandate” added to the bill which can cover sick leave and health care.

For a detailed discussion on these guidelines and more view our full webinar here. Stay tuned for the next installment of this series! We’ll be covering: sexual harassment training.

Disclaimer: The information provided in article is for informational purposes only and should not be construed as legal advice. Please contact your attorney if you seek advice in regards to any specific issues outlined above.

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