Tip Credit and Tip Pooling Laws

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 Tip Credit and Tip Pooling Laws

Working for a restaurant or other job where the primary income is earned in tips can raise questions. These may involve the rights a tipped employee has when it comes to who should manage the tips and what wage they should be paid.

The information below should help answer some common legal questions that arise when a person who works in the service industries is paid partly in tips and partly in an hourly wage.

Can I Be Paid Less Than the Minimum Wage If I Get Tips?

Depending on the law of the state in which a person lives, their employer may be allowed to pay them less than the federal minimum wage, as long as they are still earning at least the minimum wage with tips. This is called a “tip credit” because the amount the person earns in tips is credited toward the calculation of their overall wage:

  • Tip Credit States: States that allow tip credits still have separate lesser minimum wages that employers must pay to tipped employees. For example, in Illinois, the minimum wage is currently $8.25, but the minimum wage for tipped employees is only $4.95. Thus, even in tip credit states, employers still owe restaurant servers some minimum amount as an hourly wage as specified in state law;
  • Non-Tip Credit States: However, in other states, like California, employers are required to pay servers the regular minimum wage regardless of how much the server earns in tips. A person can check to see the minimum wage tipped employees are owed in each state on the U.S. Department of Labor’s website;
  • Remedies: If a person’s hourly wage combined with their tips is still less than their state’s minimum wage, then their employer must compensate them for the difference. If their employer fails to pay them the minimum wage required by their state, then the person may be entitled to back-pay for lost wages.

It is important to note that the minimum wage is the lowest hourly amount that the law allows an employer to pay a worker. In the U.S., the federal minimum wage, the minimum wage set by the U.S. government, is $7.25 an hour. Even though the U.S. has set the federal minimum wage, it allows individual states and localities to pass their own state minimum wage laws.

Of course, the minimum wage set by a state cannot be less than $7.25 an hour. Alabama, Louisiana, Mississippi, South Carolina, and Tennessee have no official minimum wage, so in those states, the federal minimum wage applies.

Twenty-nine states have a minimum wage that is above the federal minimum wage. In Oregon, the minimum wage in the Portland metro area is $12.00, the highest minimum wage of the 50 states. However, in the state outside of the Portland metro area, the minimum wage is $10.50 in rural counties and $10.75 in non-rural counties.

The other states that have the highest minimum wages are as follows:

  • Washington State with a minimum wage of $11.50;
  • California with a minimum wage of $11.00;
  • Massachusetts with a minimum wage of $11.00;
  • Arizona with a minimum wage of $10.50; and
  • Vermont with a minimum wage of $10.50.

The federal tipped minimum wage is $2.13. This means that an employee can make up to $5.12 per hour in tips, and if the employee does that, the employer can pay the employee as little as $2.13 per hour.This amount is referred to as the minimum cash wage, although the employer may not pay it in cash.

Many states have higher tipped minimum wages, but many have the federal tipped minimum of $2.13, e.g. Alabama, Georgia, Indiana, and Kentucky, among others. Several states make the tipped minimum wage depend on the total number of employees the business has. In Wisconsin, the $2.13 per hour minimum wage may be paid to employees who are not yet 20 years old and have been employed with a particular employer for 90 or fewer consecutive calendar days. The same amount, $2.13, is the tipped minimum wage in Wisconsin.

What Is Tip Pooling?

Many restaurants have tip-pooling systems where servers must tip-out bartenders, bus people, hosts, bouncers and other restaurant employees. Some establishments may even require that all bartenders or servers on the floor split their tips evenly among themselves.

While these tip pooling systems may decrease the amount of tips an employee takes home, they are generally legal as long as the tip pooling system is fair, and only employees involved in the “chain of service” receive tips. However, the employer is never allowed to receive any portion of the tips, and in some states, managers and supervisors are also prohibited from participating in a tip-pool.

What Are Tip Deductions?

In some instances, a restaurant employer may attempt to dock the pay of their servers or seize a portion of their tips for other reasons, such as:

  • A table that fails to pay;
  • Server food order mistakes;
  • A cash register shortage.

Unfortunately, while this does not seem fair, depending on the state in which the server lives, it may be perfectly legal as long as the pay-docking does not deplete the server’s income below the minimum wage.

However, in other states, such as California, this type of pay-docking is illegal unless the employer can show that the employee acted dishonestly, willfully, or in a grossly negligent manner. Still, although pay-docking in these situations may not be allowed by state law, employers are still allowed to discipline employees for mistakes.

When Do Tips Paid by Credit Card Have to Be Paid to the Employee?

When a customer pays a restaurant server their tip on the customer’s credit card, the employer must pay the server the tip amount in full by the next scheduled pay-day. However, depending on the state, the employer may be allowed to decrease the credit card tip amount by whatever percentage the credit card company charges for its service.

Do I Have to Pay Taxes on Tips?

Employees who receive cash tips of $20 or more in a calendar month are required to report the total amount they receive in tips to their employer. An employee must turn in their written tip report by the tenth day of the month after the month covered by the report. If an employee receives less than $20 in tips in a calendar month, they are not required to report their tips to their employer. But they must report these amounts as income on their tax returns and pay taxes on the tip income, if any tax is owed.

Cash tips include tips received directly from customers, tips from other employees under any tip-pooling arrangement, and tips paid by credit and debit card that the employer distributes to their employee. Employees who are tipped directly and those tipped indirectly must report tips received to their employer. This is for tax and Social Security and Medicare withholding purposes.

Employees can use IRS Form 4070A, “Employee’s Daily Record of Tips” to keep track of their tips, and IRS Form 4070, “Employee’s Report of Tips to Employer” to report their tips to their employer.

Service charges added to a bill or fixed by the employer that the customer is required to pay, when paid to an employee, are not considered tips. Rather they are considered non-tip wages. These non-tip wages are subject to Social Security tax, Medicare tax and federal income tax withholding.

Common examples of service charges (sometimes called auto-gratuities) in service industries are as follows:

  • A special charge levied on a large party in a restaurant;
  • A bottle service charge in a restaurant or nightclub;
  • A room service charge at a hotel or resort;
  • A contracted luggage assistance charge at a hotel or resort, and
  • A mandated delivery charge for deliveries of pizza or other retail commodities..

A person’s employer uses the tip reports to calculate the amount of Social Security, Medicare and income taxes to withhold for a given pay period on both wages and reported tips. Of course the employer is responsible for paying their own portion of the Social Security and Medicare taxes on their employees’ earned income.

Do I Need an Attorney for Help in Getting My Tips?

If you believe your employer is handling your wages or tips in an illegal manner, or not paying you the minimum wage that you are due, you should contact an experienced business lawyer to find out if you are entitled to back-pay or other legal relief.

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