Don't Drown In Your “Tip Pool": Complying With Minimum Wage Laws For Tipped Employees
By Paul Courtnell Director, Leisure & Resorts Group, Gunster LLP | June 26, 2011
Co-authored by Joseph Santoro, Partner, Gunster
The New Year brought the hotel industry to its lowest level in decades. The occupancy for hotels nationwide was at 45.1% in January, the lowest percentage since a leading industry analyst starting tracking the number 23 years ago, the Los Angeles Times reported in April. Facing difficult economic conditions, some hoteliers are looking for creative ways to stay out the red by reducing expenses, including labor costs. For example, some hotels have expanded the use of "tip pools" which, if done properly, can provide hotels with a federally sanctioned way to reduce payroll expenses and provide job security for more of their employees.
What are "tip pools"? In short, tip pooling is a mechanism where employers can require certain employees to contribute a portion of their direct tips (up to a maximum of 15%) into a "pool" so that they can be equally distributed to other employees who contribute to the customers' experience, but who do not receive the benefit of getting substantial tips directly from customers. For example, hosts, hostess, and busboys in a hotel restaurant may interact with customers and contribute to the overall customer service experience, but are not frequently the recipient of customers' gratuities. An employer can establish a mandatory tip pool and include these employees so that they can share in a portion of the tips given by customers.
In addition to promoting fairness in the distribution of tips for all service employees, an employer may be able to offset some of its labor costs. The Fair Labor Standards Act (FLSA) requires employers to provide a minimum wage to nonexempt employees of $7.25 an hour. However, for employees that "customarily and regularly" receive at least $20 per month in tips, employers can take a "tip credit" which allows them to legally pay covered employees less than the minimum wage. The idea being that, as long as the tips equal the difference between what the employer pays and the applicable minimum wage, the worker's total compensation satisfies the FLSA's minimum wage requirements. Accordingly, by adopting a "tip pool" employers can potentially expand the number of employees who receive sufficient tips to satisfy the tip credit requirements and take a tip credit for those employees, thereby reducing overall labor costs.
So what's the catch? Federal law is very strict regarding the type of employees for which a "tip credit" may be taken, as well as, what is required for an employer to operate a qualified tip pool. Including employees who are not qualified as participants in a tip pool (for example a tip pool that includes management employees or others who do not meet the eligibility requirements) can invalidate the tip pool and lead to liability for unpaid minimum wages, penalties, and costly litigation. If a tip pool is invalid, an employer may not use any portion of the tips received by the employee to satisfy the FLSA's minimum wage requirement and may not take a tip credit for the employee, regardless of how much money the employee receives in tips.
To be eligible to take a tip credit, employers must still pay a minimum statutory cash wage. That wage is at least one-half of the existing applicable minimum wage rate - or roughly $3.63 an hour. Also, the amount of the employee's actual tips must equal at least the difference between the employer-provided cash wages and the minimum wage in effect at the time. So, for an employer paying the statutory cash wage minimum, employee tips must be at least $3.62 an hour.