Image of a restaurant to demonstrate the issue of paying tipped employees a tipped wage. — Photo by Petr Sevcovic on Unsplash

One of the biggest problems that many restaurants face is paying tipped employees. Wage and hour lawsuits in the restaurant industry are rampant. The Economic Policy Institute found that a 2010-2012 Department of Labor (DOL) compliance sweep of 9,000 restaurants revealed that 83.8% of restaurants had some wage and hour violation and the DOL recovered $56.8 million in this sweep. Unfortunately, many restaurants make mistakes in paying tipped employees, which increases their liability in a wage and hour lawsuit. Restaurants can benefit by reviewing the basics of the tipped wage for employees.

What is the Tipped Wage?

In many states, including Texas, employers can pay an employee a wage that is less than the minimum wage if they earn tips in addition to this wage. The direct wage that employers must pay tipped employees varies, but in many states the wage is $2.13 per hour. The rest of the employee’s wages are earned by the tips that they receive from customers. These employees must still earn at least the minimum wage and the employer must pay employees more if the employee’s tips plus the direct tipped wage that the employer pays do not equal the state minimum wage. The employer must make sure that the employee is making at least the minimum wage during their shift.

The Tipped Wage and Overtime

Another common mistake that some employers make is that they fail to pay employees the proper amount of overtime. Many employers take the tipped credit for their tipped employees, but they do not realize that the overtime rate for an employee that is getting tips has to be calculated by using the minimum wage (ex. $7.25 nationally) rather than the $2.13 per hour wage that the employer often pays if they take the tip credit.

This means that a tipped employee is paid overtime wages of $7.25 x 1.5 = $10.88 per hour for each hour that they work in a week that is over 40 hours and/or for each hour that they work in a day that is over 8 hours (this depends on the laws for the particular state). Moreover, in many states you can deduct the tip credit for the overtime hours also. In our example, this is how it works: $10.88 minus $5.12 equals $5.76 for each overtime hour worked.

How Does the Tipped Wage Work?

Tipped employees, like waiters, can be paid a tipped wage for work in which they are receiving tips (e.g. waiting on a table). They cannot be paid a tipped wage for work that does not involve any tipped work.

The DOL has a helpful clarification by looking at the example of a person that has a dual job as a waiter and a maintenance person. The employee can be paid a tipped wage for work that they do as a waiter, but they must be paid at least the minimum wage for any hours that they work in a position where they do not customarily get tips, such as a maintenance person.

The DOL also explained what duties are considered tipped duties and which duties are not normally eligible for tips:

Reg 531.56(e) permits the taking of the tip credit for time spent in duties related to the tipped occupation, even though such duties are not by themselves directed toward producing tips (i.e. maintenance and preparatory or closing activities). For example a waiter/waitress, who spends some time cleaning and setting table, making coffee, and occasionally washing dishes or glasses may continue to be engaged in a tipped occupation even though these duties are not tip producing, provided such duties are incidental to the regular duties of the server (waiter/waitress) and are generally assigned to the servers. However, where the facts indicate that specific employees are routinely assigned to maintenance, or that tipped employees spend a substantial amount of time (in excess of 20 percent) performing general preparation work or maintenance, no tip credit may be taken for the time spent in such duties.

Tip Pooling: a Major Concern

Employees can be required to share their tips, but as made clear in the Consolidated Appropriations Act, 2018, managers and supervisors cannot receive any part of tips that an employee receives.

However, the Consolidated Appropriations Bill has allowed employers who pay the full minimum wage to their wait staff (i.e. they do no pay the tipped wage or use the tip credit) to mandate tip pooling (the tipped employees share tips with other employees). Essentially, if an employer wishes to do so, they can require tipped employees to share either a portion or all of their tips with employees that are working at the back of the restaurant (dishwashers, cooks, etc.) or other front of the house employees if they pay tipped employees the minimum wage. In the 7 states where employers must pay tipped employees at least the minimum wage (i.e. there is no tipped wage), requiring tipped pools can be a great way to reduce the pay difference between the front and the back of the house of a restaurant if that is permitted by state law.

Tip pools are also used at restaurants where the customer receives their food at the counter. In these circumstances, there may be a tip jar with money that is then distributed at the end of the shift.

Essentially, the government is now allowing restaurants to address one of the most frequent issues that restaurants face: the pay disparity between the front and the back of the house.

This article by Kendal Austin at Toast has some other great tips that restaurants can use to decrease the wage gap between the front and the back of the house.

The Tipped vs. Non-Tipped Pay Difference in Restaurants

Payscale has a great dataset from 2015 that explains the average wages of workers in various jobs at restaurants. Bouree Lam at The Atlantic sifted through the data and found that “Where tips amounted to 0 to 10 percent of chefs’ and cooks’ hourly incomes, for bartenders, waiters, and waitresses that number could be as high as 70 percent.” The information from Payscale, while outdated, does indicate the problems that many restaurants face in paying their employees and ensuring that they can pay back of the house employees enough to attract talent.

The wages in the Payscale dataset may actually underestimate the pay difference between back of the house and front of the house staff as the IRS estimates that 40% of tips are not reported.

Employers Can Forbid Tips

Restaurants also have the option to ban employees from receiving tips or at least letting customers know that tips are not expected. Of course, these restaurants do need to pay employees at least the minimum wage to do so.

The DC Vote to Eliminate the Tipped Wage

The recent debate in DC to eliminate the tipped wage demonstrates that many groups have a wide variety of opinions on the issue of tips. The proposal was a voter initiative that would have eliminated the tipped wage and it passed, but it was ultimately undone by a DC council vote. Many restaurant workers expressed concern that the elimination of the tipped wage would cost them money as less people would tip. As noted above, many tipped employees receive most of their wages from tips, so their concern was obvious.

The issue of the tipped wage is not going away even if more states consider eliminating the tipped wage. Employers across the country need to pay attention to their state and local laws to ensure that they are following the law on paying their tipped employees.

If you are curious about the other ways to pay employees, check out my previous article here.

The information provided in this blog is for educational purposes only and is not legal advice. If you need legal advice, then you should speak with a lawyer about your specific issues. Every legal issue is unique. A lawyer can help you with your situation. Reading the blog, contacting me through the site, emailing me or commenting on a post does not create an attorney-client relationship between any reader and me.

The information provided is my own and does not reflect the opinion of my firm or anyone else.

Image of money to demonstrate that employers need to be concerned about how to pay employees — Photo by Sharon McCutcheon on Unsplash

It should be easy to pay employees. A company writes a check or does a direct deposit and then the company does it again a couple of weeks later. Unfortunately, paying employees is one of the most difficult tasks that employers do. Lawsuits alleging violations of the Fair Labor Standards Act (wage and hour lawsuits) are up by 415% since 1997. “The top 10 employment-related settlements in 2017 totaled $2.72 billion—up from $1.75 billion in 2016.” These lawsuits are expensive! Let’s also remember that companies not only need to follow the law at the federal level under the Fair Labor Standards Act, but they also need to follow laws at the state, city, and county level. So what should employers do? Answer: They should pay their employees correctly.

Here are the Various Ways that You Can Pay Employees

1. Hourly

This is (seemingly) one of the easiest ways to pay employees. An employer pays employees the same rate for every hour that they work. Companies use this method when employees do not qualify for an exemption from overtime, their hours vary from week to week, or they are primarily part time employees.

With hourly employees there are number of things that employers need to remember to minimize potential lawsuits:

Make sure that the timeclock captures all the time that the employee spends working. Starbucks recently lost a case (in California which is not friendly to employers) for time spent off the clock “activating the store alarm, locking the front door and walking co-workers to their cars,” which took one employee 4-10 additional minutes per shift. Employers need to be careful about time that is spent off the clock. Regularly occurring off-the-clock work may be considered compensable time (paid time) in some situations.

Have a policy for reporting off-the-clock work and explain that policy to employees. In one case, Chicago police officers lost a lawsuit claiming that they were not properly paid for answering emails off-the-clock because Chicago did not forbid these employers from reporting off-the-clock work and it did not have actual constructive knowledge that employees were working off the clock.

One final note. While employers have to pay employees for working off-the-clock even if their policy forbids employees from working overtime without approval, the company may still discipline employees for violating their policy against working overtime without getting proper authorization.

2. Salary Exempt

Some employees are exempt from being paid overtime. There are a variety of exemptions, but the most common exemptions are:

If an employee meets the required salary for the exemption (usually $455 per week) and the employee meets the duties for the exemption, then employers do not need to pay them overtime.

The issue for most employers becomes whether or not the employee actually meets the required duties to be exempt. For example, Taco Bell has been sued because they allegedly classified employees as managers that did not have the authority to hire, fire, or discipline employees or recommend that employees be hired, fired, or disciplined. The managers were essentially doing the same work as other staff: cleaning, cooking, bussing tables, etc.

3. Salary Nonexempt

Employees can be paid a salary even if they are not exempt from overtime. Employers must pay these employees overtime for any hours that they work over 40 hours a week (or more than 8 hours in a day if required by state law). The reason that some companies use this method is that many employees feel that getting paid a salary is a status symbol and it makes them feel more like a professional. Many workers are paid a salary even though they are not exempt from overtime. The employers just limit their hours to 40 hours a week to avoid paying them overtime.

4. Commission

Employees may be paid a commission. Employees will typically be paid a straight commission (they only earn money when they make a sale) or a draw against commission. A draw is essentially an advance that the company pays an employee before they make any sales. For example, the company may give an employee a draw of $500 a week. At the end of the month or the relevant time period, the company would pay the employee any excess commissions that they earned. If the employee earned $5000 in commissions by the end of the month, then the employee would be paid the remaining $3000. If an employee earns less than they were paid in advance (less than the draw: i.e. they earned $1000, but were paid $2000), then the employee will owe their employer money.

The advantage of the draw against commissions is that it balances out the employee’s earnings. They get consistency in their pay every week (assuming that they always meet their sales goals).

5. Tipped Wages

An employer may take advantage of the tipped credit and only pay on employee $2.13 an hour (if not prohibited in their state or city) provided that the employee makes at least $7.25 an hour or the state or local minimum wage with tips. Essentially, the employer pays $2.13 and the employee earns at least $5.12 in tips. If an employee does not make at least the minimum wage with their tips, then the employer has to pay the employee the difference.

An opinion letter from the Department of Labor released earlier this month also eliminated the 80/20 rule, which barred employers from using the tip credit for employees that spent more than 20% of their time doing non-tipped activities.

Employers can now use the tip credit as long as the duties are related to the tipped activities. For example, employers can utilize the tipped credit for servers that clean up and set tables and other tasks related to working as a waiter or waitress.

You can read more about this issue in this post on paying tipped employees.

6. Piece Rate

This is not a recommended approach. It is basically the equivalent of when you were a kid and were paid for every can that you brought to the recycling center. You are paid a set rate for how much you produce. For example, a farmhand may be paid a set amount for the strawberries that they bring in from the fields.

The most important point to remember with a piece rate is to be sure that employees still make a minimum wage and to properly determine the employee’s regular rate so that companies pay employees the right amount for any overtime.

Here is a helpful explanation from the Department of Labor:

The regular rate of pay for an employee paid on a piecework basis is obtained by dividing the total weekly earnings by the total number of hours worked in that week. The employee is entitled to an additional one-half times this regular rate for each hour over 40, plus the full piecework earnings.

Example: An employee paid on a piecework basis works 45 hours in a week and earns $405. The regular rate of pay for that week is $405 divided by 45, or $9.00 an hour. In addition to the straight-time pay, the employee is also entitled to $4.50 (half the regular rate) for each hour over 40 – an additional $22.50 for the 5 overtime hours – for a total of $427.50.

Another way to compensate pieceworkers for overtime, if agreed to before the work is performed, is to pay one and one-half times the piece rate for each piece produced during the overtime hours. The piece rate must be the one actually paid during nonovertime hours and must be enough to yield at least the minimum wage per hour.

7. Stock Options

This cannot be your only form of payment, but it is a way to encourage employees to work for a company. For employees, they have the option of taking less in salary for the chance to make more in stock when the company goes public or at some later point. Of course, employees may end up making less money by taking stock options in lieu of a larger salary. It is a bit of a gamble.

8. Bitcoin or Cryptocurrency

Bitcoin has fallen dramatically in price since it rose to record highs last year. Jon Hyman breaks down why it is probably not permissible to pay employees directly in Bitcoin under the Fair Labor Standards Act:

The IRS treats bitcoin and other virtual or cryptocurrencies as property, not as currency.

And, the Fair Labor Standards Act requires that employers pay employees in “cash or negotiable instruments payable at par.”

Because the IRS treats bitcoin as property, it’s very likely that the DOL will not consider it “cash” or a “negotiable instrument” (i.e., a paycheck) for purposes of wage payments.

Thus, if you are not properly paying your employees under the FLSA, you have failed to pay them a minimum wage (a big FLSA no-no), no matter how valuable the Bitcoins you’re providing may be.

Conclusion

There are a lot of ways to pay employees, but the key is to do it properly. No matter how companies pay employees they need to ensure that the company has good records so that it can adequately respond to any wage and hour claim that may be filed against the company.