In March 2026, a federal jury in Texas handed down a $21 million verdict against Perry’s Restaurants after two servers successfully argued the company’s mandatory tip pool violated the Fair Labor Standards Act. The core problem wasn’t exotic: the restaurant required servers to share tips with back-of-house prep workers, including during stretches when no customers were even in the building. It’s the kind of arrangement thousands of independent restaurants run every week without a second thought — which is exactly why this case matters far beyond one Texas restaurant group.
Tip pooling itself is legal. Getting it wrong is what’s expensive, and according to the Department of Labor, tip credit and tip pooling violations remain one of the most common sources of wage-and-hour back-pay claims in the restaurant industry, with settlements routinely climbing into six figures even for single-location operators.
Tip Credit and Tip Pooling Are Two Different Things
The confusion usually starts here. A “tip credit” is the mechanism that lets you pay tipped employees a lower direct cash wage (as little as $2.13/hour federally, though many states set it higher or eliminate it) because their tips are expected to make up the difference to at least minimum wage. A “tip pool” is a separate arrangement where tips are collected and redistributed among employees rather than kept individually.
You can run a tip pool without taking a tip credit, and the rules are more flexible in that case. But the moment you take a tip credit and operate a tip pool, federal law gets strict about who can be in that pool. Under the FLSA, only employees who “customarily and regularly receive tips” can participate — servers, bartenders, bussers, host staff in many jurisdictions. Cooks, dishwashers, and prep cooks generally cannot be included if you’re claiming the tip credit, because they aren’t customer-facing tipped employees. Managers and owners can never participate in a tip pool, full stop, regardless of tip credit status — a rule reinforced by a 2020 FLSA amendment and litigated repeatedly since.
The Mistakes That Actually Show Up in Court
Looking at recent litigation, the fact patterns repeat themselves:
- Including kitchen staff in a tip-credit pool. This was the exact issue in the Perry’s Restaurants case — prep workers received pooled tips even though they weren’t tip-eligible under the tip-credit rules.
- No records of who received what. In a separate case covered by The Employer Handbook blog, a restaurant lost on summary judgment partly because it couldn’t produce records showing its tip pool distributions matched who was actually tip-eligible. If you can’t document it, courts treat it as if it didn’t happen.
- Deducting shift fees or “walkouts” from tips. A flat per-shift deduction from pooled tips — even a small one — can independently void your tip credit eligibility as a matter of law, regardless of whether the tip pool itself was otherwise compliant.
- Paying the pool when the restaurant is closed or between shifts. A Colorado federal court recently ruled, as reported by Clark Hill, that employees performing non-tipped work during closed hours don’t qualify for tip-pool distribution during that time — a reminder that the “80/20 rule” on non-tipped duties still gets enforced even after years of regulatory back-and-forth.
As Sheppard Mullin’s analysis of the Perry’s verdict points out, juries don’t need to find bad intent — a technically noncompliant pool structure is enough to trigger liability, and damages compound quickly across a full staff and a multi-year lookback period.
State Law Can Override Everything Above
Federal rules are the floor, not the ceiling. A growing number of states — California, Washington, Oregon, Nevada, Minnesota, Montana, and Alaska among them — don’t allow a tip credit at all, meaning tipped employees must receive the full state minimum wage in cash regardless of tips earned. In those states, tip pooling rules are generally more flexible since there’s no tip credit to protect, but state agencies often have their own definitions of who counts as “customarily tipped.” A pool that’s compliant in Texas can be illegal in California. If you operate in a state with its own minimum wage or wage-and-hour agency — which is most of them — check that agency’s guidance before assuming federal rules are your only exposure.
A Simple Audit You Can Run This Week
You don’t need outside counsel to catch the obvious problems:
- List every role in your tip pool and check it against your state’s definition of “customarily and regularly tipped.” If cooks, dishwashers, or prep staff are in a pool and you’re taking a tip credit, that’s your biggest exposure.
- Confirm no manager or owner — including a “working manager” who occasionally serves tables — receives pooled tips. This is a bright-line rule with no exceptions.
- Check for any deduction from tips before they’re distributed, even small administrative or walkout fees. Remove them.
- Keep distribution records showing exactly how much each employee received from the pool and on what basis. If you can’t produce this on request, you have no defense if someone files a complaint.
- Confirm your state’s tip credit status and adjust your pool structure accordingly — don’t assume the federal rules are the only ones that apply.
The Takeaway
A tip pool that’s been “working fine for years” is not the same as a tip pool that’s compliant — it just means no one has filed a complaint yet, and the statute of limitations on FLSA claims runs two to three years back. Given that a single noncompliant pool just cost one restaurant group $21 million, the hour it takes to audit your current setup against these five points is one of the highest-leverage things you can do this month. If anything looks off, fix the structure going forward and talk to an employment attorney about what, if any, exposure exists for past pay periods before an employee — or their lawyer — finds it first.
