Best Practices: Compensating Tipped Employees

Compensating employees who receive "tips" or other gratuities as part of their wages requires some additional analysis. To be a "tipped employee", the employee must work in an occupation where employees customarily and regularly receive more than $30.00 a month in tips. In states with no state based minimum wage law, the tip credit is the difference between $2.13 per hour and the applicable minimum wage. If you plan to utilize the tip credit in your business, the Department of Labor (DOL) requires tipped employee be given notice.

What exactly is a "tip"? A tip is a gratuity. If a menu says, "For groups of x or more, a service charge will be added to the bill," the DOL will conclude the employer is imposing a "compulsory service charge" not a tip. The Labor Department looks to whether the customer is aware that the "service charge" is (or is not) compulsory. The employer should not simply assume that the customer is aware that a restaurant will waive the service charge if the service is not up to expectations. The DOL has found the following language sufficiently informed customers that the charge added to the statement was in fact discretionary: "A gratuity has been added to this check for your convenience. The payment of this gratuity is subject to your complete discretion and may be increased, decreased, or eliminated entirely."

What about employees that perform both tipped and non-tipped duties (i.e., a waitress who sometimes helps in the kitchen)? The DOL applies a "total fact situation" (i.e., largely undefined) criteria to determine whether employees performing multiple duties are working in tipped jobs. But remember, if a tipped employee works tipped and non-tipped jobs, tip credit only applies to work performed as tipped employee.

Remember that employees must be allowed to retain all tips actually received. An employer may offset some costs (such as credit card charges and charge backs) but must do so at the cost to the employer. Many states, including Tennessee, have statutes which require all tips, service charges or gratuities to be paid over to the employees.

How do tips factor in to overtime compensation? The tip credit may not change for overtime hours. If dealing with a compulsory service charge, it must be included in the "regular rate" calculation used to determine the overtime rate. Where a mandatory service charge is collected by an employer such as a banquet facility, the workers who receive the "service charge" can qualify as commissioned employees who are exempt from the overtime requirements. The employees must be paid by the hour and more than half of their compensation (over a representative period of time) must come from the imposed service charge.

Tip pooling is allowed with certain conditions. The pool must not require the contribution of a greater percentage of tips than is customary and reasonable. DOL uses 15% (net) as a safe harbor. The employer may not require employees to share in a pool with employees who do not traditionally participate in tip pooling arrangements. Tipped employees may choose to participate in the pool but may not be coerced into participating.

To speak with one of our attorneys about your particular legal issue, call Kramer Rayson LLP at 865-525-5134 or contact us online. With offices in Knoxville and Oak Ridge, we regularly serve clients throughout the state and beyond.