Everything you need to know about tipping

The tipped wage rules and regulations were not always in existence.  In 1938 the Federal Labor and Standards Act was passed requiring a minimum wage for workers for the first time.  Tips were simply a bonus that employees collected in addition to their minimum wage.

In 1966, the FLSA was amended to allow for employers to claim a credit for tips their employees received.  This allowed employers to pay a sub-wage for workers who customarily receive tips. Those tips can be counted as a credit to the employees’ hourly wage rate for purposes of meeting the minimum hourly wage.  

Tipped law update effective March 23, 2018  

Employers who keep tips from an employee receiving a tip credit can be fined up to $1,000 per incident. If an employer pays tipped employees full minimum wage, tip pooling is allowed between tipped and traditionally non-tipped (back-of-house) employees.  Check your state law as many states have their own tipped wage and tip pooling regulations.

Here is a quick check-list for easy administration of your tipping practices.

1. Check your state law.  Many states have their own rules and regulations for paying employees in tips.
2. Tips are taxable and must be reported on an employee’s W-2.
3. Employees should report tips received at the end of each shift.  Use the Homebase app for tracking employee tips at the end of each shift.  
4. Use point of sale that merges with your payroll system that automatically accounts for credit card tips and cash tips entered by the employee directly into the payroll record.
5. Track average hourly wage rates after tips for tipped employees.  Employees must still earn no less than the minimum wage for your area once tips are accounted for.  If their wage falls below that, you must supplement.
6. Avoid tip pools if you can.  The regulations make tip pools difficult to stay in compliance with.
7. Never tip supervisory staff even if they are performing front of the house job duties.  
8. Avoid tipping back of the house unless your employees make the minimum wage and it is legal to do so in your state.
9. Never take away an employee’s tips.  They are consider the property of the employee who received the tip and cannot be taken away from the employee.
10. When employees make their own arrangements through a tip pool, it is permitted to distribute tips so long as the employees and not management and can self-select and determine the procedure.  
11. A tip sharing policy is permitted (although check your state law) provided it is defined in advance the rate of funds to be distributed to support staff.  Tip sharing should not tip-out management staff.

General Manager in Seattle, Washington, Mars Maynard has worked with several different tipping programs

For over 10 years, the full-service restaurant where he worked had a tipping policy mandated by the restaurant that said that all servers and bartenders tipped out ‘support staff’ and the BOH based on these rates: 1% (of servers sales) to BOH, 1% to bartenders, 1% to busser, 1% to expo, and 2% to the host.  Since managers worked as hosts, bussers, and expos they also took a share of the tip pool.

One day they received an anonymous complaint from one of the staff that they didn’t feel that it was fair that they had to give tips to managers/supervisors when they worked support shifts. They felt it was unfair that managers already made more money per hour and then were taking part of the servers tips. They provided a list of legal-ish arguments and essentially threatened to sue if it continued.

They talked to a lawyer and were advised to change their tipping practice.  The new tipping policy eliminated all management, supervisors, and back of the house staff from being tipped out, even when working a support shift. The staff had to create their own, internally voted upon, tip out structure that could be opted in or out of at any time, and would be re-voted upon each year.

Currently, Mars works as the General Manager at a bookstore and counter service cafe.  Initially, the bookstore had a standard tip pool where the Front of the House got 80% of the tips and the Back of the House, which were also the food runners, got 20%.  The cafe collected tips in bi-weekly and distributed them based on the total hours worked.

The cafe faced challenges balancing the wages of the Back of the House and the Front of the House.  They eliminated tipping entirely and gave everyone a raise (that was based on extensive number crunching of how much they averaged in tips over the course of a year), and raised all of our food and beverage prices by about 20% to offset the cost of the extra labor.  

To ease the transition with the customers, they over communicated the positive aspects of the reason for the price change to their guests. Mars said, “It may be one of the best decisions I have made as a GM, and I don’t regret it for a second.”

Mars’ main takeaways:  

• Tip Pools are a minefield of legal issues outside of the most simplistic of structures where every employee involved works exactly the same role.
• While it is totally unfair in many ways, the back of house should never be tipped out.
• It only takes one person to potentially wreck your business, even if your intentions aren’t malicious.
• Managers and supervisors or anyone in a role of authority should never be tipped out or involved in a tip pool. To be honest, they should never be tipped (also challenging)
• Eliminating tipping is the simplest way to avoid all of these issues, and it is easier than people think, but it is challenging because most places won’t do it, so you stand out, for better or worse.
• Tips are a way for restaurants and other businesses to pay their staff less. They are essentially using the public to subsidize their pay. That being said, finding a business model that doesn’t include tipping is really difficult because of the uneven playing field.

To tip or not to tip

Paying employees through tips has many concerns for both the employee and the employer side.  Restaurant owners have long struggled to understand how to comply and accurately track and pay employees who receive tips.  Much media attention has been given recently to wage theft of tipped employees where managers and business owners keep a portion of the tips they are not entitled to.  

Tipped employees also report facing harassment from both supervisors and customers. Seems that when your wage is based upon tips, you are more susceptible to abuse.

Yet, our Homebase customers report that almost inexplicably, the tipped positions are the positions most workers prefer to have.  They make more money than the back of the house and many workers prefer customer interactive work to back of the house cooking and dishwashing.

In my time spent hiring hourly employees for restaurants, on occasion, a restaurant would have a compensation structure for servers with a higher base wage and no tips.  These positions were some of the most difficult to fill. Servers seemed to prefer tipped positions even when they had the opportunity for a higher and steady base wage.