Should You Be Paying Close Attention to Employees’ Tips?

Tipping in the U.S. is customary in certain circumstances, and restaurant employees, in particular, tend to rely on tips as a source of income. However, more and more businesses are utilizing tipping practices to offset the associated costs of having employees. Even experienced employers may be neglecting some of the more intricate legal caveats of tipping, especially when it comes to federal law. Before offering tipping at a retail checkout, there are certain things to consider.

Understanding the Tip Credit

The Fair Labor Standards Act (FLSA) allows employers to apply a “tip credit” towards the minimum wage owed to tipped employees. Essentially, this means that employers can pay a lower hourly wage to tipped employees, as long as the tips received make up the difference. This ensures that the employee’s total earnings are equal to or exceed the federal minimum wage at the time.

As of this writing, the current federal tipped minimum wage stands at $2.13 per hour. Allowing employers to pay tipped employees this rate, provided their tips bring their total earnings to at least $7.25 per hour. These rates and thresholds may be higher depending on the labor laws in your state or municipality. 

Reporting Tips: Who’s Responsible? 

Employers are responsible for accurately reporting tips to the government. These tips are considered wages, necessitating income tax and FICA tax withholdings. Employers must report tips to the IRS using Form 8027. This also means that it would be wise to have policies that hold employees accountable for providing an accurate accounting of their tips. 

If an employee’s tips do not reach the federal minimum wage threshold, the employer is obligated to bridge the gap, a process known as “tip recovery.” This ensures that all employees receive at least the minimum wage for their work. However, employers are strictly prohibited from manipulating tip distribution to avoid tip recovery. Splitting tips among employees to make up for the difference between the reduced hourly wage and the minimum wage is unlawful under the FLSA.

The Takeaway 

If your employees are tipped, there are dozens of state and city labor laws that could impact day-to-day operations as well as reporting in addition to the FLSA. Wherever your business operates, there are a few things you can do to ensure that you’re following the applicable regulations.

Educate Tipped Employees: Tipped employees don’t always know their rights under the FLSA. Training and appropriate signage can create a culture of transparency and make tip reporting easier.

Maintain Accurate Records: Naturally, keeping meticulous records is essential for any business, but records involving tips will be especially important for tax reporting and compliance purposes.

Regular Audits: Conduct periodic reviews to ensure that your tipped employees consistently earn at least the minimum wage after factoring in tips. Although you may have dedicated staff or outside vendors performing this task, as the business owner, you may be liable for their mistakes. 

Navigating the rules and regulations surrounding tips in the restaurant industry is crucial for employers to maintain compliance with federal law. By understanding the tip credit, fulfilling their reporting obligations, and ensuring their employees receive at least the minimum wage, employers can foster a fair and profitable work environment. If you have questions regarding the regulations in your jurisdiction or need guidance on your tipping practices, reach out to Christopher Butler with Agenzia for a consultation.