• Use Caution in Managing Payroll Costs through Tip Credits and Tip Pooling
  • August 13, 2007 | Author: Donna Ray Chmura
  • Law Firm: Sands Anderson PC - Durham Office
  • Payroll is the largest controllable operating expense for many businesses. Tip credits and tip-pooling, if properly used, are tools that can help management control labor costs in restaurants, bars, hotels, salons, golf clubs, casinos and other service industries. These programs reduce the hard wages paid by employers by crediting patron tips against employer-paid wages. Tip credits are reductions in the minimum wage paid by the employer, with the difference made up in tips to the employee. Tip pooling is a policy of management or an agreement between employees within a business where the tips are shared by all personnel with direct customer contact.

    Both scenarios are legal and useful to the employer in controlling payroll, but even minor departures from the statutory procedure can result in huge liabilities. In the past few years, California and Massachusetts have been ground zero for class-action lawsuits alleging violations of labor laws governing the pooling and sharing of employee’s tips.

    Under the federal Fair Labor Standards Act (“FLSA”), as modified by various state labor laws, employers can reduce their payroll costs up to $3.02 per hour per employee by paying a reduced minimum wage to tipped employees, and applying patron tips toward the full minimum wage. In North Carolina, for example, the minimum wage is $6.15 per hour, but tipped employees can be paid $3.13 per hour, provided the employee earns at least $3.02 per hour in tips and the employer’s tip crediting policy complies with federal and state law. State tip credits are not permitted in Alaska, California, Guam, Minnesota, Montana, Nevada, Oregon and Washington, where employees must be paid the relevant minimum wage plus tips.

    Employees who regularly (and actually) receive $30 or more per month in tips are eligible for the tip credit. Employees must be notified of the tip credit policy. Ideally, employees should be trained on tip credit and tip pooling policy in their initial training, at which time the employment handbook is reviewed. For the tip credit to apply, an employee must retain all tips, except for any portion placed into a legitimate tip pool. If “the house” takes a cut of an employee's tips, the tip credit is unavailable. The employer must monitor employee tips to ensure that tips are at least equal to the tip credit when business is slow. Where the employee does not make the requisite $3.02 per hour in tips, the employer must make up the difference as wages.

    If an employer does not strictly observe the tip credit provisions of the FLSA, no tip credit may be claimed and the employees would be entitled to receive the full cash minimum wage, in addition to retaining tips they may\should have received.

    One exception to the requirements that employees be permitted to retain all tips is tip pooling (or “tipping out”), in which the employer requires patron trips to be shared among certain employees. Tip pooling creates more employees who are subject to the tip credit. For example, a bus person’s direct tips from patrons are virtually never enough to cover the maximum allowable $3.02 per hour tip credit. By redistributing customer tips from highly tipped positions, however, a tip pool can provide the bus person (or host or shampooer) with sufficient indirect tips to allow the employer to take the full tip credit. Through use of the tip pool, the bus person's hourly labor costs drop substantially from $5.15 per hour to $2.13 per hour (based on the federal minimum wage).

    The FLSA allows an employer to require tip pooling, although there are limitations on how much of an employee’s tips are contributed and which employees can share in the tip pool. Employees can agree to a voluntary tip-pooling arrangement that is not subject to FLSA limitations, but they cannot be compelled by the employer to do so.

    Employees are not eligible for tip pooling until their wages and tips equal the state minimum wage. Otherwise, by contributing tips toward a tip pool, the employee would actually earn less than the minimum wage.

    Employees cannot be required to contribute more than is “customary and reasonable” in the workplace. As an enforcement position, the U.S. Wage and Hour Division will not challenge pool contributions equal to 15% or less of employee tips. If the pool contribution is greater than 15%, the employer must show that the contribution is customary and reasonable in its area. In high-end establishments, or establishments where employees contribute a percentage of sales, rather than a percentage of tips, pool contributions can exceed 15 percent. An employer can provide evidence that the greater percentage is customary and reasonable in its area. Set gratuities or service charges (i.e., an 18-percent charge for parties of 6 or more) are not considered tips and are not subject to tip-pooling.

    Only other employees eligible to receive tips are eligible to participate in a tip pool. Typically, these are employees with direct patron contact, such as the waiter, host, sommelier, maitre'd, service bartender, bellhop, shampooer and table busser, but not managers, cooks, dishwashers, back-of-house employees, janitors, or laundry-room attendants. Current litigation concerns whether pastry cutters, coffee servers and silverware rollers are eligible to receive pooled tips. The job title itself may not determine whether an employee is eligible to share in pooled tips. In one case, a restaurant called its employee a “waiter” but the court denied participation in the pool because the employee merely prepared salads outside the view of patrons and without direct patron contact.

    Damages for violating the tip credit or tip pooling provisions can be payment of lost wages, an identical amount as liquidated damages, plus costs and reasonable attorneys’ fees. In addition, the employer can lose the tip credit as well.

    Reasonable managers may differ on the benefits of tip pooling. Some say it is good, because everyone in the staff works together to create a successful transaction for the patron. Others are concerned that one poorly performing employee can impact everyone’s earnings. Despite the complications from having to strictly comply with state and federal regulations, a properly administered payroll system -- using both tip credits and tip pools -- can dramatically lower labor costs.

    Employers who wish to implement required tip pooling or tip credits should consult employment attorneys licensed in their state to create a written policy compliant with both state and federal law and procedures for implementing it. As with any employment policy, a policy that is not followed is worse than no policy at all.

    For more information on this or on other business issues, please contact Donna Chmura at 919-993-3300 or [email protected]