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.