Latest / Restaurant Business with Fexingo: Food Service, Hospitality, and Independent Operators / Why Restaurant Tip Pools Are Creating Legal Exposure in 2026
Transcript
- Lucas: So there is a quiet legal landmine sitting in probably half the restaurants in America right now, and most operators don't even know they stepped on it. Luna: I feel like that sentence could apply to about ten different things in this industry. Which one are we talking about today? Lucas: Tip pooling. Specifically, the way the Department of Labor's 2021 rule changed who can be included in a tip pool, and the fact that a lot of restaurants never updated their practices to match it. That gap is now generating demand letters. Luna: Okay, I want to get into that. But first, let's make sure we are all on the same page about what a tip pool actually is. Lucas: Fair. A tip pool is when a restaurant collects all the tips left by customers and redistributes them among a group of employees. The idea is that the busser, the food runner, the bartender, the server — everyone who contributed to the service experience — gets a cut, rather than the server keeping 100 percent of what's left on their tables. Luna: Right. And historically, the big question was: who can legally be in that pool? Can you include the cooks? The dishwashers? That changed with the 2021 rule. Lucas: Exactly. Before 2021, under the Trump administration, the DOL had loosened the rules. Employers could include back of house staff — cooks, dishwashers, prep — in a tip pool even if the restaurant paid the full minimum wage and did not take a tip credit. That opened the door for a lot of places to spread tip income more broadly. Luna: And the 2021 rule reversed that. Under the current rule, if an employer takes a tip credit — meaning they pay tipped employees less than minimum wage because tips make up the difference — then only employees who customarily receive tips can be in the pool. That's servers, bartenders, bussers, food runners. Not cooks. Lucas: But here is the nuance that trips people up. If the employer does NOT take a tip credit — if they pay everyone at least the full minimum wage before tips — then the 2021 rule actually allows them to include non-tipped employees like cooks and dishwashers in the pool. So the rule is not a blanket ban on back of house pooling. It depends on whether you are on a tip credit model or not. Luna: And that nuance is where the lawsuits are coming from. Because a lot of operators heard 'cooks can't be in the pool' and never checked whether their specific setup was compliant. Lucas: Exactly. Let's get specific. There is a case from 2025 that really crystallized this. Marsh v. J. Alexander's, decided in the Ninth Circuit. J. Alexander's is a chain of about forty restaurants. They operated a tip pool that included kitchen staff, but they also took a tip credit for their servers. The court said that combination is illegal under the 2021 rule. If you take a tip credit, you cannot include non-tipped employees in the pool, period. Luna: So the restaurant was doing something that had been perfectly fine under the previous administration, and then the rule changed, and they didn't adapt. That is a classic compliance lag. Lucas: It happens all the time. And the Marsh decision created a clear path for plaintiffs' attorneys. Now they have a precedent that says if you took a tip credit and included back of house in your pool, you are in violation. And the damages add up fast. Under the Fair Labor Standards Act, you are looking at all tips that were illegally diverted from tipped employees, plus an equal amount in liquidated damages, plus attorneys' fees. Luna: Walk me through a real-world example. What does that look like for a typical restaurant? Lucas: Take a 12-unit fast-casual group in Denver that got hit with a demand letter last year. They had about 150 tipped employees across their locations. Their tip pool distributed roughly 15 percent of total tips to kitchen staff. Over three years, that came out to about four hundred thousand dollars in diverted tips. Under the FLSA, the plaintiffs' attorney demanded double that — eight hundred thousand — plus fees. The group settled for just under seven hundred thousand. Luna: Seven hundred thousand dollars because they wanted to spread tips to the dishwashers. That is brutal. Lucas: And the irony is, the group had good intentions. They thought it was fair to include the kitchen. But they took the tip credit on their servers' wages, which is standard in Colorado because the state tipped minimum wage is still below the regular minimum. That one detail — taking the credit — made the entire pool illegal. Luna: So what is the practical takeaway here? If a restaurant wants to include back of house in a tip pool, what do they need to do? Lucas: Two options. Option one: stop taking the tip credit. Pay all tipped employees the full minimum wage — or higher — before tips. Then you can include anyone you want in the pool, including cooks. Option two: keep the tip credit, but restrict the pool to employees who customarily receive tips — servers, bartenders, bussers, hosts if they perform tipped duties. No kitchen staff. Luna: And if they are in the middle and they are not sure which model they are on, first step is to look at the wage statements. Are tipped employees getting a direct wage that is less than the full minimum wage? If yes, they are taking a tip credit. Lucas: And they need a written policy. The DOL requires that any tip pool be communicated to employees in advance. The policy should say who is in the pool, how often tips are distributed, and what formula is used. No verbal handshake arrangements. Luna: I have seen places that do a weekly pool split based on hours worked. Others do a point system where a server gets two points, a busser gets one point, and so on. Do you have a sense of what is most defensible? Lucas: The most defensible approach is to have a clear, written policy that is applied consistently. The formula itself matters less than the fact that it is documented and non-discriminatory. But the safest play for any restaurant that currently includes back of house in a tip pool is to run a self-audit. Check whether you are taking a tip credit. If you are, and you have kitchen staff in the pool, you need to change one of those two things before a former employee's lawyer does the math for you. Luna: And the statute of limitations under the FLSA is two years for non-willful violations, three years for willful. So if a restaurant has been running the same pool since 2021, they have exposure going back three years. Lucas: Which is exactly why the plaintiffs' bar is active on this. The damages are easy to calculate. You just pull the tip distribution records, identify every dollar that went to a non-tipped employee, multiply by two, add fees. It is a formulaic claim. Luna: And the restaurant's liability insurance may not cover it. Wage and hour claims are often excluded from general liability policies, and employment practices liability insurance may have a tip-pooling exclusion as well. Lucas: That is a whole other layer. But let's zoom out for a second. This is one of those situations where the regulation is actually pretty clear, but the common practice in the industry has not caught up. And the cost of catching up — either switching to a no tip credit model or restructuring the pool — is real. But it is dwarfed by the cost of a settlement. Luna: So this episode is the kind of thing that could save an operator a lot of money. And that is actually a nice segue into something we have been meaning to mention. Lucas: Yeah, we deliberately do not run ads on these episodes. No sponsors, no mid-roll interruptions. That is a choice we made from the beginning because we want the content to be the only thing in the room. Luna: If these conversations have helped you in your work — maybe you caught a compliance issue or you rethought a policy — and you want to support that ad-free model, there is a simple way to do it. Lucas: It is buy me a coffee dot com slash fexingo. No subscription, no recurring charge. Just a one-time gesture if the show has moved something forward for you. And if not, no worries at all. We will keep making the episodes either way. Luna: Alright. Back to the landmine. One thing I want to flag: the 2021 rule is not the final word. There is a case pending in the Fifth Circuit, Flores v. CRH, that challenges the DOL's authority to define who is a tipped employee. If the court strikes down part of the rule, we could see another flip. Lucas: That is the regulatory whiplash that makes compliance so hard. But until that decision comes down, the 2021 rule is the law. And the safest path is to treat it as settled and audit your pool now. Luna: So final checklist: confirm whether you take a tip credit. If you do, make sure your pool only includes customarily tipped employees. Write down the policy. And run a quarterly audit of tip distribution to catch drift. That is maybe two hours of a manager's time per quarter. Lucas: Two hours versus a seven-figure demand letter. That is a pretty good trade.