Pooled Tips Have a Dramatic History—Here’s a Look at How Pooling Tips Have Shaken up Regulations Over the Years
Whether you’re a fan or not, tip pools have moved from a novelty to an increasingly favorable tip structure in the hospitality industry. In a survey conducted by Poached in 2022, 43.8% of participants claimed to pool their tips.
One key benefit of this tip structure is creating a more team-oriented work environment. Employees function as a whole to reach mutually beneficial goals while enhancing the customer experience.
Another significant advantage of tip pools is that they can reduce pay discrepancies, which have long been controversial in the hospitality industry.
Unfortunately, as the U.S. hospitality industry has incorporated tip pooling, the laws and regulations surrounding its handling have been wishy-washy.
To keep you well-versed in tip history, we’re breaking down the legalities of tip pooling over the years with a brief history of pooled tips—let’s go!
2010: Cumbie vs. Woody Woo, Inc.
As more restaurants adopted tip pools in the early 2000s, concerns about who owned tips, who should participate in tip pools, and the fairness of it all became topics of interest.
At the time, The Fair Labor Standards Act (FLSA) laid out regulations on how tip pools should be handled, but only as it pertained to employers that took a tip credit.
As you probably already know, a tip credit permits employers to apply an employee’s tipped income toward their minimum wage obligation. A tip credit is only allowed if the employee’s tips make up the difference between the state’s tipped minimum wage, which is at least $2.13, and the federal minimum wage of $7.25.
In this situation, the FLSA established that a business could only require employees to participate in a tip pool with other customarily tipped employees. So, the back-of-house house and other non-tipped employees within a restaurant could not benefit from the pool.
Without addressing guidelines for tip pools in states that did not allow a tip credit—confusion ensued, and lawsuits were filed.
Breakdown of the Cumbie vs. Woody Woo, Inc. Case
In 2010, Misty Cumbie, a server in Portland, Oregon, worked for Café Vita, owned and operated by Woody Woo Inc., Woody Woo II, Inc., and Aaron Woo.
Cafe Vita paid servers the state’s minimum wage, which at the time was $9.35. Servers were also required to participate in a tip pool with the back-of-house staff, who received a more significant percentage of the overall pool, garnering anywhere between 55-70% of the tips, while servers got 30-40%.
Cumbie filed a putative collective and class action lawsuit against Woo, claiming that Café Vita’s tip pool violated the FSLA because it included employees who were not customarily tipped and that Cumbie was entitled to her full hourly wage and all her tips.
Woo argued that the laws regulating tip pools applied only to businesses that took a tip credit, and since Woo paid the full minimum wage, their tip pooling arrangement was valid.
The Ninth Circuit Court of Appeals, which heard the Cumbie vs. Woody Woo, Inc. case, agreed that Woo’s arrangement did not violate the FLSA. The decision affected employers in the districts of the Ninth Circuit court that don’t allow for a tip credit, including in Alaska, California, Nevada, Montana, Oregon, and Washington.
2011: The Federal Department of Labor Claps Back
Since the Ninth Circuit Court of Appeals’ decision and interpretation of the FLSA’s guidelines on tip pools, it became easier to argue that employers who pay at least the federal minimum wage have full authority on who can participate in a tip pool—which might include management.
So, to curtail wage theft by management, the Federal Department of Labor (DOL) intervened and issued new regulations establishing that all tip pools that included customarily non-tipped employees, regardless of the tip credit, violated the FLSA.
Tips were deemed the sole property of the employee who received them. Tipped employees couldn’t be required to share with traditionally non-tipped employees—even when paid the full federal minimum wage.
Between the Ninth Circuit Court’s ruling in the Cumbie vs. Woody Woo, INC. case and the updated FLSA, there was much confusion and misunderstanding about what was legal and whose guidance had the most authority.
2016: The Ninth Circuit Court Conflict On Tip Pooling
Fast forward five years, and these conflicting decisions on the legalities of tip pooling come to a head in two other cases: The Oregon Restaurant and Lodging Association vs. Thomas Perez and Joseph Cesarz and Quy Ngoc Tang vs. Wynn Las Vegas LLC.
Both cases questioned the validity of the DOL’s 2011 regulations on tip pooling in light of the Ninth Circuit Court of Appeals decision in the Cumbie case.
Initially, the lower courts in Oregon and Nevada agreed that the DOLs restrictions on tip pools were invalid, siding with the employers who paid the full federal minimum wage and shared tips among traditionally tipped and non-tipped employees.
Still, on appeal, the Ninth Circuit Court flipped its decision and upheld the DOLS 2011 regulations, throwing the back-of-house out of the pool and essentially shutting down tip pools entirely.
2018: DOL Decides to Spice Things up
One year later, in 2017, The Department of Labor teased the idea of inviting the BOH back to the pool party, rescinding regulations under specific circumstances, and giving everyone whiplash.
The plan was to reverse the 2011 regulations and allow tip pooling between tipped and non-tipped employees. This would only be allowed in states without a tip credit and for employers who paid at least the federal minimum wage.
At the time, pressure was mounting as business owners in states without a tip credit faced increasing pay disparities between front-of-house and back-of-house employees. Minimum wages and living costs were rising, and tip pools proved helpful in offering more livable wages to all employees.
Still, opponents of the change were concerned that if the FLSA allowed tip sharing among traditionally non-tipped employees, it could also include management and owners, leading to wage theft.
The debates over the legalities of tip pooling took over a year until finally, on March 23, 2018, former President Trump signed a spending bill that included an amendment to the FLSA allowing tip pooling to include BOH staff so long as the employer did not take a tip credit and paid employees at least the federal minimum wage.
Additionally, the amendment prohibited employers, managers, and supervisors from participating in a tip pool even when providing services—addressing the former concerns over wage theft.
2020: Final Updates on Pooled Tips
Okay, the latest updates to the FLSA regulations regarding top pools occurred between 2020 and 2021.
During this time, the DOL published three rulemakings, introducing a series of updated regulations concerning tipped workers.
- 2020 Tip final rule
Employers can implement a mandatory tip pool with traditionally non-tipped employees like bussers, dishwashers, and cooks. Still, employers, managers, and supervisors cannot, under any circumstances, keep an employee’s tips, even in the case of a tip pool.
The 2020 Tip final rule also set forth regulations for collecting and redistributing tip money when pooling gratuities—including how quickly to redistribute the money and documentation necessary to stay accountable. - Civil Money Penalty (CMP) final rule
This rule highlights regulations around the DOLs’ ability to assess CMPs against employers who repeatedly or willfully take employees’ tips or violate minimum wage and overtime regulations established in the FLSA.
Perhaps more interestingly—this ruling also clarifies that while managers and supervisors cannot receive tips from a tip pool, they can contribute to a mandatory tip pool. Additionally, they may only keep tips that they receive from customers directly for services they solely provide.
While this ruling is set to clarify parts of the 2018 legislation, this part is confusing. It’s wise not to allow managers to take tips at all. - Dual Jobs final rule
Provides guidelines for when employers can utilize a tip credit by defining what the FLSA considers a “tipped occupation” and work that supports one.
This ruling determines that an employer cannot take a tip credit for time spent on work that is not part of a tipped occupation and then outlines what it considers a tipped occupation.
And that’s that! For now, at least… When I sat down to write this piece, I didn’t even know how complicated the laws around tip pools had been over the last decade!
We all know that restaurants run on teamwork, which is why it’s so common to hear the analogy of a restaurant being like a well-oiled machine. Every role plays a vital part in the function and success of the whole. Tip pooling recognizes everyone for their part in excellent service, though it is true that pools can offer less transparency—opening the door to wage theft.
As our country continues its love affair with tipping, it’s essential to understand how regulations have changed and continue to change—not just to stay compliant—but to become empowered to participate in the conversation as new regulations arise.
