United States

Nuance matters: New rules allow for tip sharing or service charge

INSIGHT ARTICLE  | 

On March 23, 2018, the president signed the Consolidated Appropriations Act, 2018 (Public Law 115-141) into law. One of the most important parts of the 2,000-plus page bill relates to revisions of employee tipping. According to Field Assistance Bulletin No. 2018-3, which was issued on April 6, 2018, to clarify some of the law changes, the act now prohibits employers from keeping tips received by their employees, regardless of whether the employer takes the FICA tip credit. The act also changed some of the rules that barred tip pooling (also known as tip sharing); however, the Wage and Hour Division’s administrator could still take action to revise this area.

What does this mean for restaurants and clubs?

Employers that pay the full Fair Labor Standards Act (FLSA) minimum wage, which is $7.25, to all employees are no longer prohibited from allowing nontipped employees, such as cooks and dishwashers, to participate in tip pools with tipped front-of-the-house employees. However, the law also prohibits owners, managers and supervisors from participating in tip pools.

Supporters of this rule believe that the regulation helps erase income inequality between back- and front-of-the-house employees—an inequity that has existed for many years. Tip sharing is one way that owners and managers can support all employees.

Who is a manager or supervisor?

According to the Department of Labor and 29 C.F.R. section 541.100(a)(2)-(4), managers or supervisors are defined as anyone:

  1. Compensated on a salary basis (with certain restrictions and limitations),
  2. Whose primary duty is management of the enterprise in which the employee is employed or of a customarily recognized department or subdivision thereof,
  3. Who customarily and regularly directs the work of two or more other employees, and
  4. Who has the authority to hire or fire other employees or whose suggestions and recommendations as to the hiring, firing, advancement, promotion or any other change of status of other employees are given particular weight

It is important to remember that a compulsory charge for service is not a tip and cannot be counted as tips received for purposes of the Federal FICA tip credit. Additionally, tip pooling laws must be reviewed as they vary by state.

Penalties

This act also provides enforcement to recover all tips unlawfully kept by the employer with liquidating damages. If that was not concerning enough, the Wage and Hour Division can also impose penalties not to exceed $1,100 for each violation as well as nullifying the FICA tip credit. 

If you haven’t done so already, now might be a good time to review your tipping or service charge policy. If you are using a service charge, you will want to make very sure you are in IRS compliance. If you are using employee tipping, you will want to make sure you either revise your policy to take into account these changes or review them to see if the service charge better fits your needs, keeping in mind that the service charge is not considered a tip and risks loss of the tip credit.   

Shared tips and tip reporting

  • All cash and charged tips received from customers or distributed by an employer must be reported
  • Back-of-house (indirectly tipped) and front-of-house (directly tipped) employees must report tips
  • Tips are included in gross earnings and subject to federal income taxes
  • Employers must retain records and withhold taxes accordingly
  • Employers must pay the employer share of Social Security and Medicare based on total wages plus reported tips

 

FICA tip credit

  • Employers may pay a lesser minimum wage for tipped employees—provided the employees’ tips will bring the wage up to current minimum wage ($7.25 per hour)
  • The federal tipped minimum wage is $2.13
  • Employers must properly notify employees of the FLSA tip credit rules
  • Employers may only take the tip credit when employees retain their tips
  • The tip credit may be applied when employees pool tips, but only when the employer limits the tip pool to employees who customarily and regularly receive tips

 

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