Tips cause more arguments in restaurants than anything else, including the schedule. They also cause a lot of lawsuits, almost always over the same handful of mistakes. This guide covers the federal rules, the state differences that matter, how the UK handles it, and how to split a pool so that the people in it think it is fair.
This is a practical explainer, not legal advice. Tip law changes, and state rules vary a lot, so check your state labor department's current guidance before you change how you pay.
The two questions that decide everything
Under the federal Fair Labor Standards Act (FLSA), who can be in your tip pool depends almost entirely on one thing: do you take a tip credit?
A tip credit is when you pay tipped employees a cash wage below minimum wage and count their tips toward the rest. Federally, that means a cash wage as low as $2.13 an hour, with a maximum tip credit of $5.12 against the $7.25 federal minimum.
- If you take a tip credit, your pool can only include employees who customarily and regularly receive tips: servers, bartenders, bussers, runners, barbacks, service bartenders and, usually, hosts.
- If you pay everyone at least the full minimum wage with no tip credit, you can include back-of-house staff such as cooks and dishwashers in the pool. This became legal federally after a 2018 change to the FLSA, confirmed by Department of Labor rules in 2020 and 2021.
The second question is who can never be in the pool: employers, owners and managers or supervisors. Under the FLSA, a manager cannot keep any part of employees' tips, even if they also work shifts serving tables. A manager can keep tips they personally receive directly from a guest for service they alone provided, but they cannot take a share of a pool.
Get either of those wrong and the usual consequence is paying back every dollar of tips taken, plus the tip credit you claimed, plus an equal amount in damages.
Tip pool vs tip share vs tip-out
People use these interchangeably, but they are different:
- Tip pool: all tips from a shift go into one pot and are split among eligible staff by a formula (hours, points, or a mix).
- Tip-out: each server keeps their own tips but pays a set percentage to support staff, such as 3% of sales to the bar and 2% to bussers.
- Service charge: an automatic charge added to the bill. Federally this is not a tip; it is your revenue. If you distribute it to staff, it is wages, taxed and processed through payroll. Some states (and cities like Seattle) require you to tell guests clearly where service charges go.
State rules that change the picture
States can be stricter than federal law, and many are. A few that come up most:
| State | Tip credit allowed? | Back-of-house in pool? | Notes |
|---|---|---|---|
| California | No | Yes, but not managers or owners | Full state minimum wage before tips; no tip credit at all |
| New York | Yes, in hospitality | Only tipped service staff | Detailed rules on which roles count as "food service workers" |
| Washington | No | Yes, among non-managerial staff | Service charge disclosure rules apply |
| Texas | Yes, federal level | Only if no tip credit | Follows federal rules closely |
| Florida | Yes, smaller credit | Only if no tip credit | Tipped cash wage is set as a fixed amount below state minimum |
| Massachusetts | Yes | No back-of-house | Its Tips Act is stricter than federal law and exposes owners to treble damages |
California, Oregon, Washington, Nevada, Minnesota, Montana and Alaska do not allow a tip credit at all. Several cities, including Washington DC and Chicago, are phasing theirs out.
UK: the tips allocation law
If you run a cafe or restaurant in the UK, the rules are simpler and stricter. Since 1 October 2024, the Employment (Allocation of Tips) Act requires employers to:
- Pass on 100% of tips, gratuities and service charges to workers, with no deductions except tax
- Distribute them fairly, following a written tipping policy available to all staff
- Pay out by the end of the month after the tip was received
- Keep records of tips and how they were allocated for three years
Workers can request their tip records, and can bring a claim to an employment tribunal if allocation is unfair.
How to split a pool fairly: a worked example
The two common formulas are hours-based (everyone gets the same rate per hour worked) and points-based (each role gets a weight, so a server's hour earns more than a busser's). Most restaurants end up with points, because hours alone tends to annoy the people carrying the heaviest load.
Friday dinner, $2,400 in card and cash tips, and the restaurant pays full minimum wage so the kitchen can share:
| Employee | Role | Hours | Points per hour | Total points | Share |
|---|---|---|---|---|---|
| Ana | Server | 7 | 10 | 70 | $540.19 |
| Jordan | Server | 6 | 10 | 60 | $463.02 |
| Kim | Bartender | 7 | 10 | 70 | $540.20 |
| Lee | Busser | 6 | 6 | 36 | $277.81 |
| Max | Runner | 5 | 6 | 30 | $231.51 |
| Sam | Line cook | 7 | 3 | 21 | $162.06 |
| Theo | Dish | 6 | 4 | 24 | $185.21 |
| Total | 44 | 311 | $2,400.00 |
Each point is worth $2,400 ÷ 311 = $7.717. Ana's 70 points come to $540.19, and so on (the odd rounding cent goes to the closing bartender). Notice that dish earns slightly more per hour than the line cook here. That is a deliberate choice this restaurant made, because dish turnover was costing them more than anything else. Your points are a statement of what you value, so set them on purpose.
Rules for a pool your staff will trust
- Write it down. Who is in the pool, the formula, and when it pays. Hand it to every new hire. (In the UK, a written policy is a legal requirement.)
- Use clocked hours, not scheduled hours. Otherwise the person who stayed 45 minutes late to close loses out.
- Publish the math. Show each person their points, the pool total and the per-point value.
- Pay on payroll, not from the till. It creates a record and avoids cash disputes.
- Keep managers out. No exceptions, even on the nights they bus tables.
- Review the points twice a year with input from the team.
Tip structure also has a large effect on retention, which we cover in how to reduce employee turnover in restaurants. If you are weighing it against labor cost, remember that tips paid out to staff are not part of your restaurant labor cost percentage, but service charges distributed as wages are.
FAQ
Can managers participate in a tip pool?
No. Under federal law, managers and supervisors cannot receive any portion of a tip pool, even if they also serve. Many states have the same rule.
Can cooks and dishwashers share in tips?
Federally, yes, but only if you pay all employees at least the full minimum wage and take no tip credit. Some states are stricter, so check yours.
Is a tip pool mandatory for employees?
Employers can generally require tipped employees to participate in a valid pool. What they cannot do is include ineligible people or keep any of it.
How long should I keep tip records?
At least three years. That matches federal FLSA payroll record requirements and the UK tips law.
Run your tip pool without the spreadsheet
Shiftnest calculates the pool from clocked hours using your own points or hours formula, shows every employee their share and the math behind it on their phone, and sends the totals to payroll. See how tip pooling works.
