Under federal law, tips are distributed to the employees who earn them, either kept individually by the server or bartender who received them or pooled and split among a defined group of staff according to a formula the employer sets in advance. How tips are distributed depends on three things: whether the business runs a tip pool, whether it takes a tip credit toward minimum wage, and which employees are eligible to share. Owners, managers, and supervisors are never eligible, regardless of the setup.
Tips Belong to the Employees Who Earn Them
The Fair Labor Standards Act is unambiguous on ownership. An employer cannot keep tips received by its employees for any purpose, and managers and supervisors cannot take a share either.1Office of the Law Revision Counsel. 29 USC 203 – Definitions That prohibition holds whether or not the employer claims a tip credit.
The rule looks at job duties, not titles. Someone is treated as a manager if their primary role is running the business or a recognized department, they routinely direct at least two full-time employees, and they have authority over hiring or firing.2U.S. Department of Labor. Fact Sheet 15B – Managers and Supervisors Under the FLSA and Tips Meet all three, and you’re out of the pool. A manager who personally serves a customer and receives a tip directly from that interaction may keep that individual tip, but cannot pull from pooled gratuities.3eCFR. 29 CFR Part 531 Subpart D – Tipped Employees
Getting this wrong is expensive. An employer who unlawfully keeps tips owes the full amount taken, plus any tip credit claimed, plus an equal amount in liquidated damages. The Department of Labor can also impose a civil penalty of up to $1,100 per violation.4Office of the Law Revision Counsel. 29 USC 216 – Penalties
Individual Tips or a Tip Pool
There are two lawful distribution models. In the first, each tipped employee keeps the tips they personally receive. In the second, employees contribute some or all of their tips to a common pool that gets redistributed among a defined group of staff according to a set formula.
Tip pooling is legal, and an employer can require it. What the employer cannot do is include itself, its managers, or its supervisors in the pool, and it cannot include workers outside the eligible group for the pool type it has chosen. The eligible group depends on whether the employer is taking a tip credit.
Who Can Be in a Traditional Tip Pool
An employer that pays tipped employees the reduced cash wage of $2.13 per hour and claims a tip credit of up to $5.12 to reach the $7.25 federal minimum is running what the regulations call a traditional tip pool.5U.S. Department of Labor. Minimum Wages for Tipped Employees That pool can only include employees who customarily and regularly receive tips: servers, bartenders, bussers, hosts, and similar front-of-house roles.1Office of the Law Revision Counsel. 29 USC 203 – Definitions Kitchen staff, dishwashers, and janitors are excluded.
To qualify as a tipped employee at all, a worker has to be in an occupation where more than $30 a month in tips is customary.1Office of the Law Revision Counsel. 29 USC 203 – Definitions A delivery driver who receives an occasional holiday tip doesn’t meet the threshold and isn’t part of this system.
Before an employer can even claim a tip credit, it has to notify the employee in advance of the cash wage being paid, the tip credit being taken, the fact that the credit cannot exceed actual tips, that the employee keeps all tips except those flowing to a valid pool, and that the credit doesn’t apply unless notice has been given.6U.S. Department of Labor. Fact Sheet 15 – Tipped Employees Under the FLSA Skip the notice and the employer loses the right to take the credit.
When Kitchen Staff Can Share
A 2018 amendment to the FLSA, followed by a 2020 Department of Labor final rule, opened a second path: nontraditional pools that include back-of-house workers like line cooks, prep cooks, and dishwashers.7Federal Register. Tip Regulations Under the Fair Labor Standards Act (FLSA)
The condition is strict. An employer can only include non-tipped workers in a tip pool if it pays the full federal minimum wage to every employee in the pool. No tip credit allowed. If the employer is still paying the $2.13 tipped cash wage to anyone in the pool, the pool has to stay limited to traditionally tipped roles.8U.S. Department of Labor. U.S. Department of Labor Issues Final Rule To Amend Tipped Employee Regulations Managers and supervisors are still excluded no matter which structure the employer picks.
Mixing the two setups is a common violation. An employer that keeps taking a tip credit while quietly funneling some of the pool to kitchen staff can be liable for the full amount misallocated, an equal amount in liquidated damages, and civil penalties up to $1,100 per violation.4Office of the Law Revision Counsel. 29 USC 216 – Penalties
How the Split Is Calculated
Federal law doesn’t dictate a specific formula, so employers have flexibility as long as the participants are eligible. Common approaches include splitting the total pool by hours worked, or using a point system that weights roles differently. A server might earn ten points per hour while a busser earns five, with the pool divided proportionally.
Employees should be told the distribution percentages, which roles are included, and how contributions are calculated before the pool starts operating. Employers have to keep payroll records, including tip distribution records, for at least three years.9U.S. Department of Labor. Fact Sheet 21 – Recordkeeping Requirements Under the FLSA Distributions should happen on a regular schedule aligned with the normal payroll cycle.
Credit Card Tips and Processing Fees
When a customer tips on a credit card, the card company charges the employer a processing fee on the whole transaction, including the tip amount. Federal law lets the employer pass the proportional fee along. If the card company charges 3 percent, the employer can distribute 97 percent of the credit card tip to the employee.6U.S. Department of Labor. Fact Sheet 15 – Tipped Employees Under the FLSA
There are limits. The employer can’t deduct more than the actual fee, and the deduction can’t drop the employee’s total pay below the minimum wage after accounting for any tip credit. The employer also has to be able to show it actually pays the fee percentage it’s deducting. Credit card tips are due to the employee by the next regular payday. The employer cannot hold them while waiting for reimbursement from the card processor.6U.S. Department of Labor. Fact Sheet 15 – Tipped Employees Under the FLSA Some states restrict or prohibit these deductions entirely.
Service Charges Are Not Tips
A mandatory charge added to a bill isn’t a tip, even when the receipt labels it a “gratuity.” That includes automatic percentages for large parties and fixed service fees on catering orders. The IRS applies a four-factor test: a payment is a tip only if the customer made it voluntarily, had unrestricted right to choose the amount, was free from employer policy dictating the payment, and generally could choose who received it. If any factor is missing, it’s a service charge.10Internal Revenue Service. Internal Revenue Bulletin 2012-26
The distribution consequences are significant. Service charges belong to the employer, not the staff. The employer can keep them entirely, distribute them however it chooses, or use them to fund higher base wages. When service charges are handed out to employees, they count as regular wages subject to standard income tax withholding, Social Security, and Medicare, with the employer doing the withholding.
State law and industry-specific rules on fee disclosure are moving fast. Starting in May 2025, the FTC’s Rule on Unfair or Deceptive Fees requires businesses selling live-event tickets or short-term lodging to include mandatory fees in the upfront total price, with clear descriptions of what each fee covers.11Federal Trade Commission. The Rule on Unfair or Deceptive Fees – Frequently Asked Questions It targets those industries specifically, but the trend toward transparency is expanding.
If Tips Aren’t Being Distributed Correctly
An employer that skims tips, forces employees into an illegal pool, includes managers in the pool, or claims a tip credit while including ineligible workers is violating the FLSA. Employees can file a wage complaint with the Department of Labor’s Wage and Hour Division or bring a private lawsuit.
A two-year statute of limitations applies to most claims for unpaid tips or minimum wage violations. If the violation was willful, meaning the employer knew or showed reckless disregard for the law, the deadline extends to three years.12U.S. Department of Labor. Back Pay A successful claim can recover the full amount of misappropriated tips plus an equal amount in liquidated damages, along with attorney’s fees and court costs.4Office of the Law Revision Counsel. 29 USC 216 – Penalties
Retaliation is separately prohibited. An employer cannot fire, demote, cut hours, or otherwise punish an employee for raising concerns about tip practices, whether the complaint went to the Department of Labor or was made internally. The protection covers verbal complaints and reaches former employees reporting past violations. A retaliation claim can seek reinstatement, lost wages, and liquidated damages equal to the lost wages.13U.S. Department of Labor. Fact Sheet 77A – Prohibiting Retaliation Under the FLSA
State law often provides more. Several states set higher tipped minimum wages, ban the tip credit entirely, impose stricter pooling rules, or offer broader anti-retaliation remedies. If you suspect tips aren’t being distributed correctly where you work, checking your state’s labor agency alongside the federal rules is worth the effort.