Restaurant Management: Tipped Employees

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Correctly handling employee tips is vital for restaurant owners and managers. It’s been all over the news lately and failing to follow the current laws will land you in hot water and cost thousands! On the other hand, if you’re not taking the tip credits you’re entitled to, you could be losing money. This guide will help you understand the ins and outs of managing tipped employees; how to pool tips the correct way and make sure your restaurant’s policies regarding tips are up to date. Maintain compliance with government regulations and keep away from trouble areas.

Tips Received By Staff

It’s customary for our servers and other front-of-house people to receive tips. Tipping gives waitstaff an incentive to provide superior guest service and increase sales. The custom of guests rewarding staff directly rewards good service and lessons our payroll obligation to employees, because they are directly compensated by guests.

A tipped employee is anyone making over $30 in tips every month. Tips are the property of the employee who received them. Employers may not use tips for anything other than as a credit against their minimum wage obligation. This is referred to as an FLSA (Fair Labor and Standards Act) tip credit.

server with food

A tipped employee may be required to participate in a valid tip pool as long as the restaurant's policy on tipping is disclosed ahead of time to new tipped employees and the mandatory tip pool only includes other tipped employees.

No portion of an employee's tips can be claimed by restaurant managers or owners and must be disbursed to employees at the end of the shift or on their next regular paycheck.

As a restaurant owner or manager, it’s extremely important to understand that violating the US federal Fair Labor Standards Act can put you in serious hot water with the department of labor! Knowingly underpaying employees is obviously a poor way to treat your staff for their hard work but ignorance is no excuse when it comes to the courts. If there has been a long period of non-compliance, it just takes one disgruntled employee to start a snowball that can cost you hundreds of thousands of dollars in back-pay owed.

Employer Tip-Credits

In most states, as a restaurant employer, you’re allowed to use the tips received by staff as a credit against paying minimum wage out of pocket. This credit can significantly reduce one of the most expensive costs in the business, for those located in states that allow it.

The federal government’s Department of Labor offers the following information about paying tipped employees for regular hours and overtime. Figure out how much the tipped employee would be paid according to the federal minimum wage of $7.25 an hour. If the employee received more than this amount in tips, you are only required to pay the minimum payment of $2.13 per hour to the tipped employee. Tips cover the rest!

Based on the federal law and the minimum wage of $7.25 an hour, the maximum amount of credit you can claim as a restaurant owner is $5.12.

Tip credits during overtime for tipped employees are handled a little differently. “ Over-time is paid at 1.5X the employee’s regular rate of pay, not the minimumpayment. Because the maximum credit allowed is $5.12, the difference is paid by the restaurant. Here’s an example based on a regular rate of $7.25

$7.25 X 1.5 = Overtime rate: $10.88

Maximum Tip Credit: $5.12

$10.88 - $5.12 = Remainder of $5.76 paid per hour of overtime.

money on dining plate

In most states, as a restaurant employer, you’re allowed to use the tips received by staff as a credit against paying minimum wage out of pocket.

State Versus Federal Wage Laws

State laws are not necessarily the same as the federal laws. This map shows how some states have different minimum payment amounts for tipped employees and some states do not allow a tip credit to be taken against the state’s regular minimum wage. It’s important to fully understand how tipped employees are paid according to your state’s laws to be compliance so consult your state laws for details.

us map

State Versus Federal Wage Laws

tip jar

A valid tip pool arrangement is made up of restaurant employees in positions which are customarily tipped. This includes the waitstaff, bartenders, and bussers but does not include kitchen staff, who are not customarily tipped for their services.

Although an employee may be required to contribute to the tip pool, they are not required to contribute tips that are counted as contributing to their base pay. Tips that management uses as a credit against their minimum wage obligation can not be included in the tip pool. According to federal law, employees can’t make less than minimum wage after tips.

Controversy and Fairness to Kitchen Staff

Because the law specifically makes it illegal for employers to require tipped employee’s wages to go to kitchen staff, there has been some recent controversy about fairness in the workplace as well as expensive lawsuits.

Because kitchen staff do not receive tips and may perceive their job as harder than front-of-house, there can be an increasing animosity between cooks and servers that build. In the past, one way to mitigate this was for restaurant owners to require the front-of-house to share tips with the kitchen staff.

Many restaurants have tip pools and verbal agreements with front-of-house staff that includes back of house employees but be aware that these practices put your business at risk for serious legal issues with the department of labor. The potential for an expensive class action lawsuit, because doing so is in violation of the government’s FLA law.

This is such a contentious issue that the National Restaurant Association has asked the Supreme Court to reject the authority of the department of labor to make tip pooling with the kitchen illegal.

As the law stands today, tips are the property of the person tipped. Tipped employees can not be obligated by management to share their money with back-of-house staff. Even strongly implying that they should do so is a legal gray area that could open you up to expensive legal trouble with the department of labor, if the employees can show that not tipping the kitchen lead to reduced hours, harassment or firing.

As a solution to this problem, some restaurants have begun adding a tip line for the kitchen as well. Unfortunately, at this point, few guests are familiar with this practice.

To Pool or Not to Pool Tips

When it comes to incentives, tips are the most direct way to reward excellent service. However, many staff members like pooling tips because it can foster a teamwork environment and buffer their losses when their table assignments are not as lucrative.

For example, tables with a view tend to book and have more seatings than tables near the kitchen. On the other hand, should a server who is working more tables take home the same tips as someone working less?

The culture of your restaurant and organizational approach will help you decide if tip pooling is right for your team.

Something else to keep in mind; When tips are pooled, they can not be redistributed based on performance. That would likely be seen by the department of labor as management using tips for management's use (in place of performance bonuses), which is an illegal practice specifically mentioned in the law.

The culture of your restaurant and organizational approach will help you decide if tip pooling is right for your team.

restaurant interior

Deducting Credit Card Fees From Tips

Credit card tips make it easy for guests to add a tip to their check, but along with the increased dollar amount of the check comes an increase in the merchant processing fees required to run the card. The question is whether you should deduct the processing fee from the tip amount.

In theory, it would seem like the fair thing to do, since it costs you money to facilitate the tip. However, in practice, it can be difficult to do so in compliance with the law.

Only some states allow the practice and those that do require you to make sure you’re not overestimating the charge. Still, the credit card transaction offset you charge can only be used as a tip credit against minimum the wage. You can’t take the charges out of their base pay.

Because credit card processing percentages are variable per transaction, it’s far less risky and better for employee morale to let it ride. Instead, focus on finding the POS with the lowest credit card processing fees. You’ll end up saving a lot more money taking that route.

credit card

A Future Without Tipping?

customer thinking

Some of the reasons to do away with tipping are making the payment process easier and more streamlined. A restaurant without tips may be more inviting to guests who don’t eat out often because they aren’t sure how much to tip.

There is a debate going on in the industry right now; if tipping at full-service restaurants will continue to be a practice in years to come.

Some of the reasons to do away with tipping are making the payment process easier and more streamlined. A restaurant without tips may be more inviting to guests who don’t eat out often because they aren’t sure how much to tip. Not tipping servers also closes the pay gap between kitchen and front of house workers, reducing potential animosity or losing valuable kitchen staff to the waitstaff.

Some intrepid restaurant owners have already started building on this model. Finding that prices on some dishes are more elastic than conventionally thought to be. They were able to raise prices slowly by 8-10% without customer resistance.

Instead of a tip line, they added a star rating for the food and the service. This is valuable information that allowed the restaurants to discount meals for bad service by docking servers and improving their menu, training and management style to increase customer satisfaction.

Other restaurants have simply started charging a %15 service fee to all guests. Unlike tips, service fees can be used by the management however they see fit. Restaurant owners then have the flexibility to reward staff performance or split the service fee among staff as they deem equitable.

Federal and State Labor Laws and the Fair Labor Standards Act

The department of labor is very serious about the enforcement of its laws and not knowing isn’t a valid excuse in their eyes. The frequency of which large, well-established restaurant brands are found to be out of compliance should be a clear warning that just because others flounce the law, that you shouldn’t be very careful. The last thing you want is for your hard work to be sunk by a labor dispute brought by an employee who knew the laws better than you did!

For more information on the FLSA and laws regarding tipped employees refer to the official document here:

The department of labor also has links to help you navigate state and local laws. Find your state’s labor board here:

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