The term “tip pool” refers to a common fund of gratuities among employees who perform customer services. Employees’ participation in tip pools can either be voluntary or mandatory. Employers often use tip pools as a means of redistributing gratuities to service employees who might not otherwise receive the benefit of a tip, such as a busboy or host in a restaurant. However, employer-mandated tip pooling poses certain dangers for employees. Specifically, employers may sometimes participate in or deduct earnings from tip pools in unlawful attempts to avoid paying their employees the minimum wage or portions of their employees’ earned tips. Accordingly, service-industry employees should be aware of their rights and available remedies related to tip pools under the Fair Labor Standards Act of 1938 (“FLSA”) and the New York Labor Law (“NYLL”).

NEW YORK STATE LAW

New York law defines tip pooling as “the practice by which the tip earnings of directly tipped employees are intermingled in a common pool and then redistributed among directly and indirectly tipped employees.” 12 NYCRR § 146-2.14 (b). NYLL § 196-d prohibits employers from partaking in tip pools: “No employer or his agent or an officer or agent of any corporation, or any other person shall demand or accept, directly or indirectly, any part of the gratuities, received by an employee, or retain any part of a gratuity or of any charge purported to be a gratuity for an employee.” Id. (emphasis added). However, the last sentence of this statutory provision permits tip pooling in situations involving “similar employee[s],” such as “a waiter with a busboy.” Id. (emphasis added).

In 2011, the New York State Department of Labor introduced the Hospitality Industry Wage Order, bringing greater clarity to the language of NYLL § 196-d. These regulations also provide employees with a new mechanism by which to bring an action against employers who violate tip pool regulations. The Hospitality Industry Wage Order also sets forth a schedule of permissible “tip credits.” A “tip credit” is the amount of tips earned by an employee that the law allows an employer to take as a credit against the minimum wage requirement. As of December 31, 2013, food service workers in New York must receive a wage of $5.65 per hour and a tip credit cannot exceed $2.35 per hour, as long as the workers make $8.00 per hour in total. See 12 NYCRR § 146-1.3. These rates vary across industries and change annually with the minimum wage.

Moreover, under the NYLL, a worker’s eligibility to participate in a tip pool is determined by evaluating the worker’s duties rather than his or her title. Employees eligible to participate in a tip pool “must perform, or assist in performing, personal service to patrons that is a regular part of their duties and is not merely incidental.”12 NYCRR § 146-2.14(e). Per the NYLL, eligible employees include: wait staff; counter personnel who serve customers; bussers; bartenders; service bartenders; barbacks; food runners; captains who provide direct food service to customers; and hosts who greet guests. See Id.

Recently, the New York Court of Appeals granted employers substantial flexibility in creating mandatory tip pools. In Barenboim v. Starbucks, 21 N.Y.3d 460 (2013), the Court considered two questions certified by the Second Circuit: first, whether supervisors can partake in a tip pool; and second, whether employers are required to include all eligible employees in a tip pool. See Barenboim v. Starbucks Corp., 698 F.3d 104, 107- 08 (2d Cir. 2012). With respect to the first question, the Court held that employees with limited supervisory duties can participate in a tip pool “meaningful authority or control over subordinates.” Barenboim v. Starbucks Corp., 21 N.Y.3d at 473. (emphasis added). The Court observed that meaningful authority “might include” the power to discipline subordinates, assist in performance evaluations, take part in hiring and firing decisions, and have input into the creation of works schedules of other employees (thereby affecting their compensation). Id. As to the second question, the Court held that the NYLL does not generally require employers to include all eligible employees in a tip pool. Id. at 474.

FLSA AND FEDERAL LAW

Tip pooling claims under the FLSA involve many of the same considerations as claims under the NYLL. Federal regulations define a tip as “a sum presented by a customer as a gift or gratuity in recognition of some service performed.” 29 C.F.R. § 531.52. Mandatory tip pooling is when hourly employees who are entitled to the protections under the FLSA are required by the employer to group all or a portion of their earned tips into a common pot, which is subsequently split up and redistributed pursuant to a predetermined scheme. See 29 U.S.C. § 203(m); 29 C.F.R. § 531.54. The Department of Labor considers tipped employees to be those who “customarily and regularly receive more than $30 per month in tips.” 29 U.S.C. § 203(t). Federal requirements set a minimum wage payment of $2.13 per hour and a maximum tip credit of $5.12 per hour. See 29 U.S.C. § 203(m); 29 C.F.R. § 531.54. Employers must pay employees their earned tips do not raise his or her hourly rate to the minimum wage.

Like the NYLL, the FLSA expressly prohibits employers and management from participating in tip pools and requires employees who participate in tip pools to provide customer service. See Chu Chung v. The New Silver Palace Rest., Inc., 246 F.2d 220, 229 (S.D.N.Y. 2002); see also Gionfriddo v. Jason Link, LLC, 769 F. Supp. 2d 880, 893- 894 (D. D.C. Md. 2011); Shahriar v. Smith & Wollensky Rest. Grp., Inc., 659 F.3d 234, 240 (2d Cir. 2011). Under federal law, the general factors governing whether an employee has supervisory duties precluding participation in a tip pool include: “[1] [the] authority to suspend or terminate employees . . .; (2) supervision of the wait staff and [making] hiring decisions; (3) [taking] responsibility for the restaurant’s budget, including analyzing payroll and food costs; and (4) receipt of a salary . . . regardless of the number of hours . . . worked.” Widjaja v. Kang Yue USA Corp., 09-CV-2089 (RRM) (CLP), 2011 WL 4460642 (E.D.N.Y. Sept. 26, 2011) (internal citations and quotations omitted).

CONCLUSION

In sum, if you are paid a reduced hourly wage, participate in a tip pool and engage in customer service as part of your job, you should pay attention for signs of unlawful tip pooling. Employers’ unlawful tip pooling practices often include: 1) deducting money from a tip pool; 2) failing to compensate employees if their hourly rate with tips falls below the minimum wage; and 3) allowing management members to participate in a tip pool.