Illegal Tip Pools? Fix Your Tip Credit Now

Confused about tip credit and tip pools? Learn how to pay tipped staff legally, protect your business from lawsuits, and design compliant policies that workers actually trust.

You run (or advise) a bar, restaurant, hotel or delivery platform where tips are part of everyday life – and you’ve heard “tip credit” and “tip pooling” can save payroll costs. But one wrong rule in your handbook, one manager dipping into the pool, or one week where the math doesn’t close can trigger back pay, penalties, DOL investigations, and class actions. Let’s break down, de forma direta, what the law expects from employers and how to stay safely dentro das regras.

Tip credit 101: how it really works under the FLSA

Basic structure

Under the FLSA, federal law allows certain employers to count part of an employee’s tips toward the minimum wage. This is the tip credit.

• Federal minimum wage (current): $7.25/hour.
• Minimum direct cash wage for tipped employees (federal): $2.13/hour.
• Maximum federal tip credit: $5.12/hour (7.25 – 2.13).

If the employee’s cash wage + tips is less than $7.25/hour in any workweek, the employer must make up the difference. States may require higher cash wages or ban the credit entirely.

Key conditions to use the tip credit

• The worker is a tipped employee (regularly earns ≥ $30/month in tips federally; some states use higher thresholds).
• The employer gives proper written or clearly documented notice before using the tip credit.
• All tips belong to the employee, except for a valid tip pool.
• No tip credit can be taken for hours spent in non-tipped work beyond allowed limits (dual jobs / directly supporting tasks rules).

Mandatory employer notice and recordkeeping duties

What you must tell tipped employees (before taking the credit)

Before using any tip credit, the employer must clearly explain, in a language and format the worker understands:

• The exact cash wage you will pay.
• The tip credit amount you intend to claim.
• That tips are used to reach the required minimum wage.
• That all tips belong to employees, except for a lawful tip pool.
• That the tip credit applies only if these rules are followed.

Best practice (and often critical in litigation): put this in writing, have employees sign acknowledgments, and keep copies.

Records you should maintain

• Hours worked by each tipped employee (by workweek).
• Cash wages paid.
• Reported tips (charged + cash, where applicable).
• Tip pool contributions and distributions.

Tip pooling: who can share tips, and under what conditions?

Legal tip pools

A tip pool is allowed when it only includes employees who customarily and regularly receive tips, such as servers, bartenders, bussers, barbacks, and some counter staff.

• When taking a tip credit: the pool must exclude kitchen staff who do not customarily receive tips, managers, and supervisors.
• When paying at least the full minimum wage in cash (no credit): a broader “nontraditional” pool may include back-of-house staff, but never managers or supervisors.

Managers and supervisors: bright red line

Managers and supervisors cannot take money from a tip pool. They may only keep tips:

• Directly and solely given to them for service they personally provided; and
• Not as part of a mandatory pool that pulls tips from subordinates.

Dual jobs and side work

Employers may only claim the tip credit for hours an employee spends in a tipped occupation or directly supporting it, within regulatory limits. Substantial non-tipped duties (e.g., heavy cleaning, prep unrelated to immediate service) cannot be indefinitely subsidized by tip credit. Track roles and tasks with clarity in schedules and job descriptions.

Practical compliance steps: building a defensible system

Step 1: Map your pay structure

• List each position and whether it is tipped, supports tipped work, or non-tipped.
• Check state and local law for higher minimum wages or tip credit bans.
• Decide: tip credit, full minimum wage, or hybrid by role.

Step 2: Design a lawful tip pool

• Define eligible roles in writing (e.g., servers, bartenders, bussers).
• Exclude managers/supervisors from the pool.
• Set a clear contribution formula (e.g., percentage of tips, sales, or points).
• Explain distribution rules and timing in your policy and onboarding.

Step 3: Tighten documentation & technology

• Use a POS or payroll system that tracks tips and hours per employee.
• Run automatic checks: any week where tips + cash < legal minimum triggers top-up pay.
• Keep copies of tip credit notices, policies, and signed acknowledgments.

Examples: how compliant policies look in practice

Common mistakes that trigger lawsuits and audits

• Letting managers or supervisors share in any tip pool.
• Using a one-size-fits-all pool that includes nontraditional roles while claiming a tip credit.
• Failing to provide a clear, documented tip credit notice to employees.
• Not tracking weekly whether cash wage + tips reach legal minimums.
• Forcing employees to cover walkouts, shortages, or damages from their tips.
• Ignoring stricter state or local laws that override federal baselines.

Conclusion: protect your margins without stealing your staff’s tips

Tip credit and tip pooling can be powerful tools, but they come with strict obligations. When you respect that tips belong to workers, keep managers out of the pool, follow written notice rules, align with state law, and run disciplined weekly checks, you preserve your savings, avoid expensive disputes, and build a culture where employees believe the system is fair.