Please note: We are not a legal firm and do not provide legal advice. This article is for informational purposes only. Consult with a qualified attorney before implementing any practices discussed herein.
Running a restaurant or hospitality business means navigating a complex web of wage and hour laws, especially when it comes to tip pooling. While tip pooling can be a fair and efficient way to distribute gratuities among your team, doing it incorrectly can lead to serious legal and financial consequences. So what happens if an employee sues you over improper tip pooling?
Let’s break it down with facts straight from the U.S. Department of Labor and relevant Fair Labor Standards Act (FLSA) guidance.
Under the FLSA, employers may require tipped employees to share their tips with certain coworkers, but only under specific conditions.
Traditional Tip Pools apply when employers take a tip credit, that is when they pay employees less than the federal minimum wage in direct wages, making up the rest with tips. In this case, tips can only be shared among employees who “customarily and regularly receive tips”, such as servers, bussers, and bartenders.
❗ Cooks, dishwashers, and managers cannot receive tips in this scenario.
Nontraditional Tip Pools are allowed when employers pay at least the full federal minimum wage ($7.25/hour) in cash wages. In this case, back-of-house employees like cooks and dishwashers may legally participate in tip pools. However, managers and supervisors are still strictly excluded from receiving tips.
There are a few common scenarios where tip pooling practices violate the FLSA:
Even if you had no intention to break the rules, violations still count and can result in lawsuits.
When a tipped employee sues their employer for illegal tip pooling under the FLSA, they may seek:
If the employer included ineligible employees or management in a tip pool, they can be forced to return all misallocated tips.
If the employer took a tip credit improperly, the court may require them to pay the full minimum wage for every hour worked, as if no tip credit had been taken.
Under the FLSA, courts can also award an equal amount in liquidated damages, effectively doubling the amount owed.
Employers are typically required to cover the plaintiff’s legal fees and court costs if the employee wins.
👉 In short: You could end up paying thousands of dollars in back wages, penalties, and legal fees, even for just one misstep. Stressed About Tip Pooling? There's a Software for That
A frequent mistake is assuming a shift lead or “key holder” isn’t a manager. However, if the employee has hiring, firing, or scheduling authority, or influences these decisions, they may be classified as a supervisor under the FLSA, and must not receive tips.
Another risk is when a dual-role employee (like a maintenance worker who occasionally serves) is treated entirely as a tipped employee. Only the hours worked in the tipped position count toward tip pooling and tip credit eligibility.
Here are a few practical steps to reduce your risk:
Ensure compliance and protect your business from costly lawsuits with TipHaus’s Operator Risk Mitigating Checklist for Tip Pooling.
Incorrect tip pooling can be a costly mistake for hospitality employers. Even a well-intentioned policy can lead to lawsuits, penalties, and reputational damage if not implemented carefully. Understanding the legal rules, and using the right tools, can keep you compliant and protect both your team and your bottom line.
TipHaus was built to help employers automate compliant tip pooling and distribution, giving you full visibility and control while keeping your team fairly paid. If you're unsure whether your current practices are legally sound, now is the time to assess and correct them, before the lawsuits start.
To learn more, click here and see what TipHaus can do for your restaurant.
