The restaurant industry in the US employs approximately 10% of the workforce, which is about 15.6 million Americans (American Restaurant Association; Pew Research Center.) Of those restaurants, 9 out of 10 of them employ less than 50 people which generally means the owner wears many hats from day-to-day.
Given the nature of the restaurant industry in the US, many of the workers receive a portion of their compensation through tipped earnings. These tipped wages present a variety of challenges when it comes to paying them accurately and compliantly. Here, we discuss the most common challenges and pitfalls of restaurant payroll and how to overcome them.
Tipping Basics: What is considered a tipped employee and why are they unique?
Tipped employees are employees who receive more than $30 per month regularly in tips, according to the Department of Labor. Those tips belong solely to the employee, but they must report those tips to their employer in writing by the 10th of the following month after the tips are earned/received. Most employers collect the tips in writing before the end of the current pay period. Employers are able to use reported tips as part of the FLSA Tip Credit.
Tip Credit under Fair Labor Standards Act (FLSA)
The difference between the required cash (hourly) wage ($2.13 / hour) and minimum wage ($7.25 / hour) is considered a Tip Credit for employers under Fair Labor Standards Act (FLSA). That $5.12 difference is the maximum tip credit an employer can earn per hour, per employee, as long as the employee earns enough tip money to cover the minimum wage obligation. More simply, an employer can pay their employee an hourly rate of less than the minimum wage with the expectation that tipped money earned will subsidize the difference to get to the actual minimum wage.
If the employee does not earn enough tipped wages to cover the $5.12 variance, the employer is responsible for meeting the minimum wage obligation for the employee.
If an employee works multiple jobs with the same employer, the tip credit only applies to the tipped role. For example, if an employee works as a concierge and janitorial staff, the tip credit would only apply in the concierge role because there are regular tips in that occupation. The employee must be paid at least minimum wage in the non-tipped role.
**PLEASE NOTE: the figures used above represent the federal minimum wage and tipped wage amounts. Oftentimes states will require a higher wage, which supersedes these federal requirements.
Service charges are not tips
Tips are defined by the IRS as, "discretionary (optional or extra) payments determined by a customer that employees receive from customers." Since Service Charges are mandatory charges to a customer that the business adds to a customer’s check, they are not considered tips. This money is considered income to the business and is not applicable to count towards tip credit.
As an example, if a restaurant specifies a mandatory 18% charge added to parties of 6 or more it is included as a line-item in the bill, that is a service charge and is part of the employer’s gross receipts. This is not considered a tip to the employee. On the other hand, if there is a suggestion for a tip amount at the bottom of the receipt and the customer decides what the tip should be, the amount the customer chooses to write on the tip line is considered a tip and should be paid directly to the employee.
Overtime for tipped workers earning less than minimum wage
When a tipped employee works overtime, the tip credit is calculated at the full minimum wage amount, not the required cash wages. This is because employers can’t take a larger tip credit for overtime hours than they can for regular wages. Employers are able to take the same tip credit rate but not higher in an overtime scenario. It’s important to note that if an employee doesn’t make equal to or greater than the tip credit amount per hour in tips, the employer is responsible for paying the employee up to minimum wage.
We’ve broken down the math here, but if you are a PaySteady client we’re taking care of this for you already. No need to take notes or memorize!
Tip pooling and who can be included
Tip Pooling happens when a group of employees is required to share their tips with other employees by combining the tips and dividing them among a certain number of employees. It is important to note that the employer is never allowed to take a portion of the tips from the tip pool. Tips are for employees only.
Generally, only regularly tipped employees are eligible to receive tips through a tip pooling arrangement. However, if an employer doesn’t take the tip credit and pays all employees at least minimum wage, all employees are eligible to participate.
For example, if a restaurant pays servers and bartenders the $2.13 cash minimum wage and participates in the tip credit, non-tipped employees such as cooks are not eligible to be part of the tip pool. However, if a restaurant pays all employees minimum wage, all employees are eligible to be part of the tip pool.
Deducting Credit Card Fees from Tips
When a customer adds a tip to a credit card purchase, employers generally pay a credit card company a fee on that purchase. The DOL permits employers to subtract the fee, generally a percentage of the transaction amount, from the employee’s tip. For example, if the credit card processing fee is 2%, the employer is permitted to pay the employee 98% of the tip given to them in that transaction. However, if the 98% puts the employee under minimum wage, the employer is responsible for paying the employee the difference to meet minimum wage.
The practice of deducting credit card fees from individual transactions is complex and tricky, especially because the amount of each transaction fee will be different and will have to be calculated, tracked and deducted prior to the next payroll. Keep in mind that some states prohibit this practice as well.
The less time-consuming task would be to put time into finding a credit card merchant with low processing fees up front and alleviate the headache that deducting credit card fees from employees’ paychecks will cause.
While payroll with tipped employees can be tricky, at PaySteady we’ve got your back to make the entire function as easy as possible. As always, we welcome your questions anytime at 703-672-1225 or payroll@paysteady.com.