Quick Answer: Under the FLSA, tips are the legal property of hourly team members who receive them. Employers can require tip pooling among staff who customarily receive tips, like servers, bartenders, and bussers. However, managers, supervisors, and owners are prohibited from keeping any portion of tips.
What Are the Legal Rules for Tip Pooling?
Tip pooling can get complicated fast—especially when you're deciding who's in and who's out. Here's what federal law actually requires.
Tip pooling is legal when limited to staff who customarily and regularly receive tips. According to DOL Fact Sheet #15, valid tip pools can include customer-facing roles like servers, bartenders, bussers, hosts, and food runners who regularly interact with customers. According to DOL Fact Sheet #15B, managers and supervisors are categorically prohibited from participating, regardless of whether they occasionally work the floor.
The rules for tip pool composition depend on whether you take a tip credit. If you pay tipped staff the reduced minimum wage ($2.13/hour federally) and take a tip credit, your tip pool must exclude back-of-house staff like cooks and dishwashers. However, if you pay all team members the full federal minimum wage ($7.25/hour or higher state minimum) without taking a tip credit, federal law permits you to include back-of-house staff in mandatory tip pools.
How Do Different Tip Distribution Methods Work?
Once you know who's in the pool, the next question is how to split things fairly. There's no single right answer—but here are the most common approaches.
- Percentage-based pooling typically has servers contribute 3–5% of tips to bussers and 1–2% to hosts. This method is simple and easy to explain to your team.
- Point-based systems assign weighted values to different roles. Servers might receive 4 points per hour while bussers receive 2 points. At shift end, you divide total tips by total points to find the dollar value per point, then multiply by each team member's points. This method works well when roles have different customer interaction levels and reward responsibility while maintaining transparency.
- Hours-worked systems distribute tips proportionally based on time clocked. Many restaurants use hybrid approaches—pooling front-of-house tips using percentage or point methods while allocating a separate percentage to back-of-house by hours worked when paying full minimum wage to all staff.
Remember: Managers cannot participate in any tip distribution arrangement, and back-of-house inclusion requires paying full minimum wage without claiming a tip credit.
What Records Do You Need to Keep for Tip Distribution?
If you're ever audited or face a wage dispute, your recordkeeping is your best defense. Here's what federal law requires.
You must maintain tip records for four years. According to IRS recordkeeping requirements, you must track tips received by each team member, amounts distributed from pools, and any tip credit calculations. Team members receiving $20 or more in cash tips monthly must report those amounts to you by the 10th of the following month using Form 4070.
A written tip pooling policy communicated to all staff is essential. Document which positions participate, how distributions are calculated, and when tips are paid out. This demonstrates compliance and strengthens your legal position in disputes.
Track cash and credit card tips separately. Credit card tips should be processed through regular payroll to ensure proper tax withholding, while cash tips can be distributed immediately at shift end. Under the FLSA, all tips must be fully redistributed by the end of the pay period.
How Does Homebase Help with Tip Distribution?
It's 11 PM on a Friday night. Your servers are exhausted, waiting for you to calculate their tips before they can go home. You're double-checking math, dividing by points, hoping you didn't miss anything. We help you eliminate the end-of-shift scramble with accurate time tracking, streamlined timesheets, and integrated payroll that handles tip reporting automatically.
When your team's time records are accurate, tip distributions based on hours or points become straightforward calculations instead of manual headaches. Superpower your tip distribution with automatic tracking that keeps your team happy and gets everyone home faster.
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Sources and Methodology
At Homebase, we rely on up-to-date, authoritative sources to ensure every Question Center article provides accurate guidance for small business owners. We start with primary federal materials from the IRS and Department of Labor, verify details using official agency publications, and use reputable industry resources only to supplement—never replace—official law.
For this piece, we referenced DOL Fact Sheet #15 on tipped employees, DOL Fact Sheet #15B on managers and tips, IRS tip recordkeeping and reporting guidance, and the December 2020 DOL final rule on tip regulations.