In March 2026, a federal judge ordered Perry’s Steakhouse to pay more than $21 million for including non-tipped workers in their tip pool between 2019 and 2022. The breakdown: $3.44 million in unpaid wages, $7.07 million in misappropriated tips, and matching penalties on top of that. That single case shows what’s at stake when tip pooling goes wrong.
Tip pooling is one of the most misunderstood areas of restaurant labor law. The federal rules set a baseline, but more than 20 states add their own restrictions on who can participate, whether you can require pooling, and how the tip credit changes the equation. Get it wrong and you’re looking at lawsuits, DOL investigations, and penalties that can shut down a restaurant.
This guide breaks down tip pooling laws by state, walks through the federal FLSA rules, explains how the tip credit interacts with pooling, covers who can and can’t participate, and gives you a step-by-step process for setting up a compliant tip pool.
Tip pooling is a formal arrangement where employees contribute some or all of their tips into a shared fund that gets redistributed among eligible staff members based on a set formula. Instead of each server keeping only the tips from their own tables, the money goes into a common pot and gets divided up.
Most restaurant tip pools work in one of three ways:
The goal behind tip pooling is fairness. It smooths out the luck factor — where one server lands a generous table while another gets stiffed — and it recognizes that service is a team effort. Bussers, food runners, and bartenders all contribute to the guest experience, and pooling gives them a share of the result.
These two terms get used interchangeably, but they work differently in practice and under the law.
| Feature | Tip Pooling | Tip Sharing (Tipping Out) |
|---|---|---|
| How it works | All tips go into a centralized pool and get redistributed by formula | Individual servers give a set percentage of their sales or tips directly to support staff |
| Who manages it | Employer sets the policy and formula | Usually a direct, bilateral arrangement between employees |
| Typical use case | Counter-service, coffee shops, teams doing similar work | Full-service restaurants where servers earn individual tips |
| Transparency | Everyone knows the formula and total pool size | Varies: servers decide how much to tip out, unless the employer sets percentages |
| Legal regulation | Regulated under federal and state law with specific eligibility rules | Less regulated, but still subject to the same FLSA and state restrictions on who can receive tips |
With tip pooling, the employer controls the system. With tip sharing, individual servers typically handle their own tip-outs to bussers, bartenders, and hosts. The key legal point: both systems must follow the same rules about who can and can’t receive tips. Managers and supervisors are excluded from both.
The Fair Labor Standards Act (FLSA) sets the federal baseline for tip pooling across all 50 states. State laws can add restrictions on top of the FLSA, but they can’t weaken its protections. Here’s what federal law requires:
The Consolidated Appropriations Act of 2018 was the biggest shift in federal tipping law in decades. Before 2018, there was a legal gray area around whether back-of-house workers like cooks and dishwashers could join tip pools. The 2018 law settled it: employers who pay the full minimum wage (no tip credit) can include back-of-house staff in the pool.
Under the FLSA, anyone with meaningful authority over hiring, firing, scheduling, or supervising employees can’t receive tips from a pool. This applies regardless of whether the employer takes a tip credit. If a shift lead also waits tables, they still can’t participate in the pool during shifts where they carry out supervisory duties.
Federal law prohibits employers from retaining any portion of employee tips. You can’t use tips to cover business costs, offset wages, or supplement your own income. This was reinforced by the 2018 amendments, which added civil penalties for violations.
Whether you take a tip credit directly changes who can join the pool. This is where most restaurants get tripped up, so the next section breaks it down.
A tip credit lets employers pay tipped workers a lower cash wage and count their tips toward the minimum wage. Under federal law, the cash wage can be as low as $2.13 per hour, with a maximum tip credit of $5.12 covering the gap to the $7.25 federal minimum.
Here’s how the tip credit changes your pooling options:
| Scenario | Who Can Join the Tip Pool |
|---|---|
| Employer takes a tip credit (pays less than full minimum wage) | Only employees who “customarily and regularly” receive tips: servers, bartenders, bussers, hosts. Back-of-house staff (cooks, dishwashers, prep cooks) are excluded. |
| Employer pays full minimum wage (no tip credit) | Both front-of-house and back-of-house employees can participate. This is the rule established by the 2018 law. |
Here’s a worked example. Say your state’s minimum wage is $15 per hour, and you take a $5 tip credit, paying servers $10 per hour in cash. Under this setup, your tip pool is limited to front-of-house tipped staff. If you want to include your kitchen team, you’d need to pay everyone the full $15 per hour and drop the tip credit entirely.
Seven states don’t allow the tip credit at all: Alaska, California, Minnesota, Montana, Nevada, Oregon, and Washington. In those states, employers already pay full minimum wage, so the broader pool eligibility rules apply by default.
While federal law sets the floor, state laws often add extra requirements. Some states ban mandatory tip pooling, others restrict back-of-house participation even when no tip credit is taken, and several have their own penalty structures for violations.
The table below covers the key rules for every state. States not listed individually follow only the federal FLSA baseline.
| State | Tip Credit Allowed? | Cash Wage (Tipped) | Key Tip Pooling Rules |
|---|---|---|---|
| Alaska | No | $11.73 (full min wage) | No tip credit. Employers pay full minimum wage. BOH may join pools under federal rules. |
| California | No | $16.90 (full min wage) | Mandatory pooling is allowed. Managers, supervisors, and owners excluded. Tips are sole property of employees (Labor Code 351). Employers can’t deduct credit card fees from tips. |
| Colorado | Yes | $11.79 | Tip credit capped at $3.02. Tip pools limited to tipped employees when credit is taken. |
| Connecticut | Yes | $6.38 (servers) | Different cash wage rates for servers ($6.38) vs bartenders ($8.23). Standard federal pooling rules apply. |
| Florida | Yes | $8.98 | Tip credit of $3.02. Standard federal pooling rules apply. Rates adjust annually on September 30. |
| Hawaii | Yes (limited) | $12.75 | Small tip credit of $1.25. Employer must guarantee total compensation equals at least $1.25 above minimum wage. |
| Illinois | Yes | $9.00 | Tip credit of 40% of minimum wage ($6.00 credit). Standard federal pooling rules. |
| Massachusetts | Yes | $6.75 | Strict rules: only “wait staff employees” who serve food/beverages or clear tables can join pools. Managers excluded even on shifts where they serve. Penalties up to $25,000 per violation. |
| Minnesota | No | $11.13 (full min wage) | Employers can’t require tip pooling. Voluntary tip sharing among employees is permitted. No mandatory pools. |
| Montana | No | $10.55 (full min wage) | No tip credit. Standard federal pooling rules apply for voluntary arrangements. |
| Nevada | No | $12.00 (full min wage) | No tip credit. Tips belong to employees. Standard federal rules on pooling eligibility. |
| New York | Yes | $10.65 (varies by region) | Only employees who personally serve patrons as a “regular and principal part” of their job can join pools. NYC, Long Island, and Westchester have higher cash wage rates. Notice requirements apply. |
| Ohio | Yes | $5.25 | Tip credit of $5.25. Standard federal rules apply. Rate adjusts annually. |
| Oregon | No | $14.70–$15.95 (varies by region) | No tip credit. Tip pools should be employee-initiated, not employer-directed. Three minimum wage tiers: standard, Portland metro, and non-urban. |
| Pennsylvania | Yes | $2.83 | Tip credit of $4.42. Standard federal pooling rules apply. |
| Texas | Yes | $2.13 | Follows federal minimum. Standard FLSA pooling rules apply. No additional state restrictions. |
| Washington | No | $16.66 (full min wage) | No tip credit. One of the highest minimum wages in the country. Standard federal pooling rules apply. Seattle’s minimum is higher ($20.76). |
| Washington, D.C. | Limited | $10.00 | Initiative 82 is phasing out the tip credit. As of 2025, the tipped wage is $10.00 with a cap of 75% of minimum. Full phase-out expected by 2027. |
States that follow federal rules only (no additional state-level tip pooling restrictions): Alabama, Arizona, Arkansas, Delaware, Georgia, Idaho, Indiana, Iowa, Kansas, Kentucky, Louisiana, Michigan, Mississippi, Missouri, Nebraska, New Hampshire, New Jersey, New Mexico, North Carolina, North Dakota, Oklahoma, Rhode Island, South Carolina, South Dakota, Tennessee, Utah, Vermont, Virginia, West Virginia, Wisconsin, and Wyoming.
Wage rates change annually in many states. Always verify current figures with your state’s department of labor before setting up or modifying a tip pool.
This is where most restaurants make costly mistakes. The rules depend on two factors: your state’s laws and whether you take a tip credit.
There’s a gray area with working managers, people who carry a managerial title but also serve tables. The federal rule is clear: if they exercise supervisory authority, they’re out. Some state courts have applied a “dual role” test, but the safest approach is to keep anyone with management responsibilities out of the pool entirely.
Now that you understand the legal framework (who can participate, how the tip credit changes the rules, and what your state requires), let’s get into the practical side: setting up a tip pool that keeps you compliant.
A well-structured tip pool protects your business legally and keeps your staff satisfied. Here’s how to build one from scratch.
Start with your state labor department’s website. Look for tip pooling regulations, tipped minimum wage rates, and any restrictions on mandatory pooling. If you operate in multiple states, or near a state border where employees commute, check each state separately. Rules differ and you need to comply with whichever is stricter.
This is the biggest decision because it determines who can join the pool. Taking the tip credit saves labor cost up front, but it limits your pool to front-of-house tipped employees. Paying full minimum wage costs more per hour but lets you include kitchen staff, which can help with staff turnover and retention in back-of-house roles.
Write a clear list of which positions are included in the pool and which aren’t. Be specific: “Servers, bartenders, bussers, and food runners are included. Managers, shift leads, prep cooks, and dishwashers are excluded.” If you don’t take a tip credit, update the list to include back-of-house positions where appropriate.
Pick one of the three methods (equal split, hours-based, or points-based) and document the formula. Write it down so every employee can understand exactly how their share is calculated. Running the numbers on each scenario before you launch helps you find the right balance for your team.
Put everything in writing and include it in your restaurant employee handbook. Your written tip pooling policy should cover:
Federal law requires employers who take a tip credit to notify employees of the tip pool arrangement. Several states, including New York, have their own notice requirements. Have every employee sign an acknowledgment form when they’re hired and whenever the policy changes.
Track all tips received, the pool totals, and how distributions are calculated for each pay period. These records are your first line of defense if a complaint is filed. Many POS systems can automate this tracking, which reduces errors and saves time during audits.
Minimum wage rates change, state laws get updated, and your staffing model may shift. Review your tip pooling policy at least once a year, and any time your state announces changes to labor or licensing requirements.
Tip pooling violations aren’t just expensive. They can trigger DOL investigations, class-action lawsuits, and reputational damage. Here are the most common mistakes restaurant owners make and what they cost.
This is the number one violation. In 2025, Massachusetts cited Zuma Boston for approximately $1.8 million after promoted managers continued participating in the server tip pool. The rule is simple: if someone has managerial authority, they’re out — even if they also wait tables during the same shift.
In November 2025, the DOL found that owners of Chopstix Buffet in New Orleans were keeping credit card tips from employees. The investigation recovered $81,681 in stolen tips for 12 workers. Under federal law, tips are the sole property of employees. Owners can’t take a cut under any circumstances.
The Perry’s Steakhouse case is the textbook example. Including non-tipped workers in a tip pool while also taking a tip credit violated the FLSA and cost the company $21 million. If you take the tip credit, your pool stays front-of-house only. Period.
Without documentation, you have no defense. The DOL can request tip records going back three years. If you can’t show how tips were collected, pooled, and distributed, you’re assumed to be in violation. Good restaurant operations management starts with keeping clean records.
| Violation Type | Potential Penalty |
|---|---|
| FLSA tip pooling violation | Back wages + equal amount in liquidated damages (double pay) |
| Federal civil money penalty | Up to $1,100–$2,451 per violation |
| State penalties (varies) | Massachusetts: up to $25,000 per violation. California: up to $250 per violation. |
| Class-action lawsuits | $100,000 to $21+ million depending on scope and duration |
The math is straightforward: compliance costs pennies compared to what violations cost. If you’re unsure about your current setup, consult an employment attorney who specializes in restaurant labor law.
Yes, tip pooling is legal under federal law and in most states. The FLSA allows employers to require tip pooling as long as they follow the rules about who can participate and don’t take a share themselves. A few states like Minnesota don’t allow employer-mandated pools, but voluntary tip sharing among employees is permitted everywhere.
It depends on whether you take a tip credit. If you pay every employee the full minimum wage (no tip credit), federal law allows back-of-house workers like cooks and dishwashers to join the pool. If you take a tip credit, only front-of-house employees who regularly receive tips can participate. Check your state’s rules too, since some states have additional restrictions.
No. Under federal law, managers and supervisors with authority over hiring, firing, scheduling, or discipline can’t receive tips from a pool. This applies regardless of whether they also perform tipped duties. The safest approach is to keep anyone with a managerial title out of the pool entirely.
Mandatory tip pooling means the employer requires all eligible employees to contribute to the pool. It’s company policy. Voluntary tip pooling means employees choose to share tips on their own, without employer involvement. Both are legal at the federal level, but some states (like Minnesota and Oregon) restrict or prohibit employer-mandated pools.
Contribution amounts vary widely. In a full tip pool, servers contribute 100% of their tips, which then get redistributed by formula. In a tip-out arrangement, servers typically share 20–30% of their tips with support staff. There’s no federal law setting a maximum percentage. The key is that the arrangement is documented, consistent, and doesn’t reduce any employee below minimum wage.
You could face back-pay claims for every affected employee, liquidated damages equal to the back pay (effectively doubling the amount), civil penalties from the DOL, and state-level fines. For large restaurants or long-running violations, damages can reach millions. The DOL can investigate going back two to three years.
Federal law doesn’t explicitly require a written policy, but having one is considered a best practice and some states require written notice. A written policy protects you during audits, helps settle employee disputes, and shows good faith if a complaint is filed. Include it in your training manual.
Under federal law, employers can deduct the proportionate credit card processing fee from an employee’s tip (typically 2–3%). However, some states, including California and Massachusetts, prohibit this practice entirely. Check your state law before making any deductions.
Seven states prohibit the tip credit: Alaska, California, Minnesota, Montana, Nevada, Oregon, and Washington. In these states, employers must pay the full state minimum wage before tips. Washington, D.C. is also phasing out its tip credit under Initiative 82, with full elimination expected by 2027.
If you operate in more than one state, you must follow each state’s individual rules. A restaurant business plan for multi-state operations should include a state-by-state compliance review. You can’t apply the most lenient state’s rules across all locations. Each location follows its own state law, or the federal baseline, whichever is more protective for employees.
Tip pooling doesn’t have to be complicated, but it does have to be legal. The restaurants that get into trouble are the ones that set up a pool based on what feels fair rather than what the law allows. Knowing the rules, at both the federal and state level, is the foundation of a tip policy that protects your business and treats your team right.
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