To Tip or Not to Tip
Hospitality employers face a myriad of employment law compliance challenges, including meeting federal and state wage and hour laws, properly calculating overtime pay and determining how to tip their employees. In the past year, there has been a sharp increase in lawsuits claiming that service industry employers are violating the Fair Labor Standards Act (FLSA) by not properly paying their tipped employees minimum wages and overtime. This article provides general information concerning the application of the FLSA to employees who receive tips.
TIP CREDITS AND REPORTING
Tipped employees are those who customarily and regularly receive more than $30 per month in tips. Tips are the property of the employee. The employer is prohibited from using an employee’s tips for any reason other than as a credit against its minimum wage obligation to the employee (tip credit) or in furtherance of a valid tip pool. Only tips actually received by the employee may be counted in determining whether the employee is a tipped employee and in applying the tip credit.
The FLSA permits an employer to take a tip credit toward its minimum wage obligation for tipped employees equal to the difference between the required cash wage (which must be at least $2.13) and the federal minimum wage. Thus, the maximum tip credit that an employer can currently claim under the FLSA is $5.12 per hour (the minimum wage of $7.25 minus the minimum required cash wage of $2.13).
The following guidelines must be followed in order for an employer to take a tip credit:
- The amount of cash wage the employer is paying a tipped employee, which must be at least $2.13 per hour
- The additional amount claimed by the employer as a tip credit, which cannot exceed $5.12 (the difference between the minimum required cash wage of $2.13 and the current minimum wage of $7.25)
- That the tip credit claimed by the employer cannot exceed the amount of tips actually received by the tipped employee
- That all tips received by the tipped employee are to be retained by the employee except for a valid tip pooling arrangement limited to employees who customarily and regularly receive tips
- When tipped employees work overtime hours, employers must be careful to calculate and pay overtime wages based on the employee’s correct hourly rate. In other words, overtime must be calculated based on the employee’s full minimum wage (currently $7.25 under the FLSA) and not based upon the employee’s reduced hourly wage (that reflects the tip credit). Only after overtime wages are calculated using the employee’s full minimum wage can employers subtract the total tip credit from the wages due.
- Employers cannot deduct the costs of uniforms, walk-outs, breakages of equipment, or cash register shortages from the minimum wages of tipped employees.
- Employers must be familiar with the local state laws in their jurisdiction. Several states forbid or limit the amount of tip credit an employer can claim. For example, employers in Alaska, California, Oregon and Washington cannot claim a tip credit. Florida does not allow an employer to claim more than $3.02 for a tip credit. Depending on job title and description, New York employers are entitled to claim a tip credit that ranges from $1.10 through $2.90. Thus, familiarity and compliance with local laws is mandatory.
- That the tip credit will not apply to any tipped employee unless the employee has been informed of these tip credit provisions. This notice requirement can be met by displaying a Department of Labor poster, which includes a description of tip credits. Even better, employers should have employees sign an acknowledgment form outlining employer's awareness of their taking a tip credit against the minimum wage.
Employees must report tip income on IRS Form 4070, Employee's Report of Tips to Employer, or on a similar statement. This report is due on the 10th day of the month after the month the tips are received. This statement must be signed by the employee and must show the following: (1) the employee's name, address, and SSN, (2) employer's name and address, (3) the month or period the report covers, and (4) the total tips received. No report is required from an employee for months when tips are less than $20.
Federal law requires that tipped employees keep all of their tips, but does allow “tipped employees” (and only tipped employees) to pool or share their tips with each other. Here are some common rules to follow if you permit the pooling of employee tips:
- Employers and supervisors cannot share the employees’ tips under any circumstances. Any employee, regardless of title, that performs the supervisory functions may not benefit from tips.
- To be considered a tipped employee that can participate in the tip pool, the employee must have sufficient direct customer interactions to warrant benefiting from the tips provided by the customer. Waitresses, bus boys and service helpers can participate in the pool. Dishwashers, kitchen employees or laundry room attendants cannot share in tip pools.
- The tip pool cannot reduce the wages of the tipped employee below the direct minimum wage. Employers cannot require employees to pool tips in excess of 15% of the individual employee’s tips.
If tip credit or tip pool regulations are violated, employers may forfeit the tip credit for both wage and hour and IRS purposes. Employers may be responsible for the paying tipped employees their full minimum wages going back two years (or three years for willful violations), and for back taxes as well as contributions to the employees’ social security benefits.
NO TIPPING POLICIES
In local jurisdictions where $15-an-hour minimum wage laws are taking effect, many service establishments are implementing "no tipping policies" and raising prices of goods to cover the increase in cost of employee wages. In addition, employers feel there is a fundamental inequity in food service establishments were the people who worked in the kitchen are paid half as much as the people who worked with customers and receive tips. This is because the law requires that tips are not shared with kitchen staff, whereas the revenue from certain types of surcharges and higher menu prices can be distributed to all employees through higher wages for all.
More, in jurisdictions where tipping is subject to confusing federal, state and local regulations and tax laws, eliminating tips would simplify payroll and bookkeeping. Managers say it would also allow them to better calibrate wages to reward employees based on the length of their service and the complexity of their jobs.
If employers claim to prohibit the payment of tips to its employees, or are "no tipping" establishments these policies must be strictly enforced. Customers need to be clearly notified on signs, menus and receipts and told by employees that tips are not allowed. Employees should sign off on acknowledgement forms that they understand tips cannot be accepted, and that discipline will be imposed if this employer policy is violated. If a no tipping policy is ignored, tips will not be properly paid, recorded or reported to state and federal taxing authorities and will expose service establishments to numerous legal risks, law violations, government agency audits and employee lawsuits described above.
Stinson Leonard Street attorneys regularly review employee pay practices and can assist your company in reducing their legal risk and exposure. If you need assistance in this area, contact.
Carrie Francis is a member of the firm's Labor, Employment and Employee Benefits practice group. Carrie works from the firm's Phoenix office. For more information please contact Ms. Francis or your usual Stinson Leonard Street contact.