If you're active on social media, you'll see many people have strong feelings about tipping culture in the 2020s. But, no matter your feelings on the topic, employers in the restaurant industry have to deal with some cold, hard facts: tip pooling regulations can be incredibly confusing to navigate.
How does it work when employees get tips at counters versus waiting tables? Do you need to include auto-grat charges in employee pay? Here's what you need to know about tipped wages, tip pooling, and other aspects of restaurant wage compliance:
Per the US Department of Labor, the federal tipped minimum wage is $2.13 per hour. They define a tipped employee as one who receives at least $30 per month in tips. While many professions, such as artists and estheticians, receive tips in addition to fees for their services, this regulation primarily applies to restaurant employees who are tip-dependent.
Some states mirror this regulation, such as Alabama and Tennessee. However, other states, like Arizona and Washington, have their own tipped minimum wage. In seven states, there is no tipped minimum wage. State minimum wage must be paid to employees regardless of tips in Alaska, California, Minnesota, Montana, Nevada, Oregon, and Washington. In California, restaurant employers with 25 or fewer employees can pay $12 per hour, while employers with 26 or more employees must pay $13 per hour.
Certain cities and counties have their own minimum wage laws, such as the City of Austin's $20.80 per hour minimum wage, while the Texas state minimum wage is $7.25 per hour. Some cities exempt restaurant workers from these regulations with either the federal tipped wage or a specially defined rate, but others require them to receive the full local minimum wage before tips are considered.
Michigan, Arizona, Ohio, Massachusetts, and Connecticut are considering eliminating their tipped wages in 2024, following suit with California and other states mandating full minimum wage regardless of tips.
Tip credits allow restaurant employers to pay a subminimum wage to tipped employees, providing that you are not in one of the seven states in the last section that abolished this practice. The federal tip credit is $5.12, the difference between the $2.13 tipped wage and the federal minimum wage of $7.25. Some states have their own maximum tip credit based on higher state minimum wage, or tiered systems for restaurant employees.
If the employee receives a tipped wage and does not earn enough tips to earn minimum wage for their hours worked, they must be paid the difference. To further complicate restaurant payroll management, if tipped employees have to share their tips with back-of-house staff or managers, then a tip credit cannot be claimed. Employees who spend more than 20% of their time on non-tipped duties, such as taking inventory or rolling silverware, also must be paid the full minimum wage for hours worked, and a tip credit cannot be claimed.
For instance, if a server at your restaurant earns $400 in tips during a 35-hour work week, the tipped minimum wage is $74.55 for the week for a total of $474.55. The server's hourly wage for 35 hours that week is $13.56. The tip credit applies here since that week's tips brought their pay over the federal minimum wage.
However, next week will be very slow. The server works 35 hours again but only gets $80 in tips. They earn the same $74.55 base pay, but only took home $154.55 for the week. This comes to $4.41 per hour, so you need to make up $2.84 per hour to pay the federal minimum of $253.75 ($7.25 per hour for 35 hours).
Willfully violating tip credit rules can be costly. You may be held liable for back wages, additional damages, and civil penalties of up to $1,100 per violation.
Tip pooling regulations can be a tangled web of restaurant wage compliance. Some states, like New York, don't allow tip pooling. Tip pooling is the practice of tipped workers contributing a portion of their tips to a pot that gets tipped out to front-of-house employees like hosts and bussers. Generally, only workers who interact with customers can participate in tip pools, although back-of-house employee tips are also becoming more common today.
Tip pooling is not the same as tip splitting, which is a voluntary arrangement between tipped employees and other staff. Under federal tip pooling regulations, management and supervisory staff cannot be in tip pools. Additional training and monitoring can help your restaurant stay compliant.
Service charges are not the same as tips, even if the intent is to provide more equitable pay to your employees. Service fees, auto-grats, large party fees, and other mandatory service charges paid by the customer are distinguishable from tips under federal law.
The customer must pay a tip of free will, determining how much to leave or if they tip at all. The employer or their payment processor can suggest the tip amount, but it should not be subject to any employer's policy. The customer also decides who receives the payment if they are waited on by multiple employees.
A service charge is none of the above. The employer determines them for all customers or only certain customers (such as large parties). Service charges are part of your restaurant's revenue and are not required to be allocated to employee pay. If they are, however, they would need to be part of the employee's wages. Some states and cities also mandate whether you can add service charges and if they must be paid to staff.
Equal wage versus tipping culture debates create a confusing web of federal, state, and local regulations for paying restaurant employees. Robust technological solutions tailored to the restaurant industry can help you stay on top of tip pooling regulations, differentiating service charges from tips, and other aspects of restaurant payroll management so you can focus on serving up memorable dishes for your community.
With Workforce PayHub as your technology partner, we stay up to date on crucial legislative changes affecting the restaurant industry and strive to simplify your monitoring, reporting, and compliance measures.
Ensure your restaurant meets all wage and tip compliance standards with Workforce PayHub. Contact us today to learn more about our tailored payroll solutions.