Restaurant Basics: What is the Tip Credit?

Restaurant owners are constantly making costly decisions involving their business and employees. With the Department of Labor’s recent decision to  abandon the 80/20 Rule, we thought it may be helpful to bring it back to basics and break down the pros and cons of employers taking a tip credit from their employees.

What is a tip credit?

The Fair Labor Standards Act (FLSA) allows employers to take a tip credit from their minimum wage obligation for tipped employees equal to the difference between the required cash wage and the federal minimum wage. Currently, the maximum tip credit under Federal Law equates to $5.12 per hour. The minimum cash wage the employer can then pay their tipped employee is $2.13 per hour.

Please note, there are many state and local requirements that differ from the above Federal requirements. Some states do not allow an employer to take a tip credit at all. Reach out to your HR Consultant if you have any questions regarding these amounts.

When can a tip credit be taken?

Legally, employers can only take a tip credit if they are properly communicating the amount of the cash wage the employer will pay the tipped employees, along with the tip credit amount the employer is taking from the minimum wage obligation. Additionally, all tips received by the tipped employee are to be retained by the employee, except in situations where a valid tip pool arrangement is in place.

Remember, the tip credit is only allowed when employees are making at least the required minimum wage in tips. If an employee does not make enough in tips that pay period, the employer will need to pay the difference, ensuring they are paid the minimum wage. This is often times referred to as “make up to minimum”.

Who are tipped employees?

The FLSA defines a tipped employee as someone who customarily and regularly receives at least $30 in tips per month from paying customers. Most commonly, these employees are servers, bussers, runners, and/or bartenders.

Remember, managers and supervisors are never eligible for tip pools!

How is the overtime rate calculated with a tip credit?

Calculating a tipped employee’s overtime rate is often done incorrectly due to misinterpretation of the overtime calculation. It is important to understand and clarify the accurate way to calculate this overtime rate when employers are taking a tip credit from the minimum wage obligation.

To keep it simple, overtime is calculated on the full minimum wage, and not the cash wage payment. Here’s the calculation:

(State or Federal Minimum Wage x 1.5) – Applied Tip Credit = Overtime Hourly Rate

And here’s a worked example using the federal minimum wage:

($7.25 x 1.5) = $10.88 – $5.12 = $5.76/hour, which is the compliant overtime hourly rate for a tipped employee.

As you can see, this can be quite time consuming to do manually. For restaurant clients using StratEx’s payroll, no need to worry, our system can automate this calculation compliantly, and save you the hassle.

What is the 80/20 Rule anyway?

Previously, courts would look into the amount of time employees spent completing non-tipped duties to determine if an employer is eligible to utilize a tip credit. These duties include clearing and cleaning tables, rolling silverware, preparing salads, and sweeping floors. If that time exceeded 20% of an employee’s workweek, the employer would NOT be able to take a tip credit and the employee would be eligible for the full minimum wage. Given the recent guidance from the Wage and Hour Division, as highlighted above, employers no longer have to worry about adhering to the 80/20 Rule. Restaurants can rest assured they are in compliance when taking a tip credit from an eligible tipped employee, as long as said employee is performing tasks and duties related to the tipped occupation (regardless of whether those tasks are directly related to serving guests).

The Pro’s & Con’s of a tip credit

Employers can reap financial benefits when they legally administer a tip credit. Not only are employers able to lower their payroll costs, but also their Medicare and Social Security payroll taxes may be lowered, leaving restaurant owners with more money in their bottom line.

According to new government data, reported by Restaurant Business Online in October of 2018, the restaurant industry is facing a shortage of labor and has lost 18,200 jobs. Additionally, with a record low unemployment rate, employees have more negotiating power and leverage to seek out employers who are willing to pay above the minimum wage. Restaurants who are looking for a competitive advantage may consider paying closer to or above the minimum wage and decide against taking a tip credit, to help increase their talent pool in such a tight labor market.

Adding to my colleague, Krystal Hentges’s, recent blog post regarding engaging back-of-house employees, it may be beneficial for restaurants to consider including their kitchen staff in a tip pool to boost engagement and productivity. As a result of a Field Assistance Bulletin published in 2018,employers are permitted to include traditionally non-tipped employees (like cooks and dishwashers) in a tip pooling arrangement provided employers are not taking a tip credit, and are paying the full minimum wage to all employees. As a reminder, under no circumstances can managers or supervisor be included in a tip pooling/tip sharing arrangement.

If your restaurant has a tip pooling arrangement in place, the best practice is to have your StratEx HR Consultant review this policy to ensure the validity and compliance with local, state, and federal law. Not only is having a clearly defined policy important, but also having all eligible participants acknowledge their understanding of such policy is a key factor for compliance. Please keep in mind, some states prohibit tip pooling with back-of-house employees and further place restrictions on tip pooling policies.

Ultimately, restaurant employers should consider these factors, in addition to the administrative burdens, when evaluating whether it makes sense to take a tip credit from those eligible tipped employees.

It is important that restaurants are aware that taking a tip credit can pose risk under the Fair Labor Standards Act and they should consult their Human Resources department and/or reach out to their designated StratEx HR Consultant for guidance on compliance!

2018 Year End HR Best Practices

Review your Handbooks

With the New Year comes changes to legislation and specific legal updates at the federal, state and local level. Additionally, if your employee headcount has increased over the course of the year, you may now need to adhere to federal, state, and local laws that previously were not applicable. Make sure to revise any updated policies or procedures in your handbook in order to remain compliant in the coming year.

Update Labor Law Posters

If there have been major updates since the last time you ordered labor law posters, you should order new federal and state labor law posters for 2019. This will ensure all new and applicable labor law notices are posted for your employees’ reference. GovDocs is a recommended vendor for ordering all-in-one labor law posters. Check out this link for more details. Otherwise, you can reference our Locally Sourced HR Newsletter for monthly labor law poster updates throughout the year.

ACA Reporting Deadlines

If you were an Applicable Large Employer in the 2018 calendar year (50 or more full time/full time equivalent employees) you are required to report in 2019. Make sure you have a plan in place for issuing and filing 1094/5-C forms.

StratEx offers ACA reporting services. Please reach out to your HR Consultant with any further questions on this topic.

The deadline for filing has been extended as it has been the past few years. The deadline to distribute the 1095-Cs to your employees is March 4th, 2019.

Please keep an eye out for future StratEx communications that include important deadlines.

Prepare for State-Mandated Harassment Training

Be sure to act on any new and/or updated sexual harassment prevention training requirements if you employ in California, Delaware, and/or New York, as these three states have updated and/or implemented new training requirements effective as early as January 1st, 2019. As a reminder, Connecticut and Maine already have sexual harassment training requirements in place.

This is a good time to prepare when you’re going to conduct your training throughout the year. Reach out to your StratEx HR Consultant to discuss training solutions if you need to comply with these requirements.

Implement Sick & Family Leave Legislation

Several states, cities and counties will have new or updated paid sick or family leave legislation go into effect starting in 2019. A few specific ones to call out:

  • Remember New Jersey passed a Paid Sick Leave effective 10/29/18
  • Massachusetts Paid Family and Medical Leave Notice required to be sent on 1/1/2019 & employer and employee contributions begin on 7/1/2019
  • Michigan’s new Paid Sick Leave law is expected to take effect on 3/20/2019
  • Rhode Island Paid Sick Leave accrual and usage rate increase on 1/1/2019
  • Washington requires collection of employee contributions for paid family leave benefits beginning on 1/1/2019
  • Washington DC requires employer contributions for Universal Paid Leave on 7/1/2019
  • Westchester County, New York’s Paid Sick Leave law takes effect on 4/10/2019

Please don’t hesitate to reach out to your HR Consultant regarding which state and local leave laws may be affecting your location(s) and/or your business.

Conduct an I-9 Audit

With increased focus on immigration compliance, the new year is a great time to review for any mistakes from the past year and guard your company against costly fines. Your HR Consultant can assist both with audit best practices and proactive training to prevent further errors.

Review your Pay Practices

Many states have been passing Equal Pay laws over the past few months, and we anticipate that this trend will continue. As a reminder, California, Delaware, Massachusetts, Albany County, New York, New York City, Westchester County, New York, Oregon, and Vermont already prohibit employers from asking about an applicant’s salary history. In 2019, Connecticut and Hawaii join them in prohibiting salary history inquiries.

Hedge your potential liability here by reviewing your current pay structures and your application materials.

If you’re wondering where your state(s) falls in all of this, reach out to your HR Consultant.

Prepare for EEO-1 Reporting

As a reminder, 2018 EEO-1 filing will be due March 31, 2019. As of right now, salary data will not be required to be reported. If you are required to submit EEO reporting, start reviewing your demographic data. There are several reports in eStratEx to assist you in identifying any gaps. Please reach out to your Service Team or your HR Consultant for any questions on the reports.

OSHA Electronic Reporting

Employers with 250 or more employees that are subject to OSHA’s recordkeeping requirements must submit data from Forms 300A, 300 and 301 by March 2, 2019.

Employers with 20-249 employees in certain high -risk industries must submit data from Form 300A by March 2, 2019.

State Plans that have not yet adopted this rule include: California, Illinois, Maine, Maryland, Minnesota, New Jersey, New York, South Carolina, Utah, Washington and Wyoming. OSHA clarified that employers in State Plans are expected to electronically submit data, even if their state has not completed adoption of its own state rule.

If you are wondering whether these electronic reporting requirements apply to your organization, please reach out to your HR Consultant.

If you are a StratEx client and have any questions about these topics, please reach out to your HR Consultant or your StratEx Service Team.

The Ripple Effect of Minimum Wage Ordinances

img_3876-1On Thursday, April 14th, groups of labor protesters walked the city streets of Chicago. Their demand: raise the minimum wage to $15 per hour. Protests like these continue to impact the trends of City and State minimum wage increases across the country.

So, how do the growing demands of groups like these impact small businesses, customers and job seekers alike?

Let’s take a look.

First, here is a quick breakdown of three recently passed minimum wage ordinances: the City of Chicago, the State of California, and three different ordinances throughout the State of New York.

Chicago:
Effective Date

Non-Tipped Employees

Tipped Employees
Current $10.00 $5.45
1-Jul-16 $10.50 $5.95
1-Jul-17 $11.00 Increases with CPI
1-Jul-18 $12.00 Increases with CPI
1-Jul-19 $13.00 Increases with CPI
1-Jul-20 Increases with Consumer Price Index (CPI) Increases with CPI
California:
Effective Date

26 or More Employees
25 or Fewer Employees
1-Jan-17 $10.50 $10.00 (current rate)
1-Jan-18 $11.00 $10.50
1-Jan-19 $12.00 $11.00
1-Jan-20 $13.00 $12.00
1-Jan-21 $14.00 $13.00
1-Jan-22 $15.00 $14.00
1-Jan-23 $15.00 $15.00
New York City: Effective Date
11 or More Employees

10 or Fewer
31-Dec-16 $11.00 $10.50
31-Dec-17 $13.00 $12.00
31-Dec-18 $15.00 $13.50
NY Employers in Nassau, Suffolk and Westchester Counties: Effective Date
31-Dec-16 $10.00
31-Dec-17 $11.00
31-Dec-18 $12.00
31-Dec-19 $13.00
31-Dec-20 $14.00
31-Dec-21 $15.00
NY Employers in remaining part of State:
Effective Date
31-Dec-16 $9.70
31-Dec-17 $10.40
31-Dec-18 $11.10
31-Dec-19 $11.80
31-Dec-20 $12.50
1-Jan-21 Rate will increase to $15.00 on an indexed schedule to be set by the Director of the Division of Budget (DOB) in consultation with the Department of Labor.

 

It is probably too early to say who will be impacted the most by such legislation. A growing concern for small-businesses located outside of the City of Chicago may be whether they can afford to compensate employees to compete with the Chicago market, especially as the minimum wage continues to increase. On the opposite end of the spectrum, small businesses, within the city limits of Chicago, may find themselves asking whether they can afford to continue operations in the city. This in turn, may drive businesses to consider relocating jobs.

ChicagoProtests2

Last summer, one of my clients provided feedback they had received from reputable employment agencies, Pro Staff and AIG: there was a shortage of available seasonal workers. They attributed this shortage to employees that were not as willing to work for wages below Chicago’s $10 per hour minimum wage.

That leaves us with the question:

“Will people be willing to work for a lower minimum wage in surrounding areas, whether that be Chicago’s suburbs, or in the surrounding states of California and New York, knowing that they may be able to find employment nearby for a higher wage?”

If suburban companies continue to see a decline in available workers, how will those companies respond …Increase their labor costs? Offer employees other forms of compensation? Raise price of goods?

HiringI would be remiss not to mention the arguments behind these recent minimum wage increases. One primary argument is that this addresses the cost-of-living increases; Chicago city officials estimate that more than 400,000 Chicago workers will benefit for this reason alone. In addition, proponents for raising the federal minimum wage argue it would increase economic activity, reduce poverty as well as government welfare spending, and spur job growth.

Economists from the Federal Reserve Bank of Chicago predicted that a $1.75 rise in the federal minimum wage would increase aggregate household spending by $48 billion the following year, thus boosting GDP and leading to job growth; however, such labor increases may end up of having the opposite effect on workers and job seekers, as job-creation may begin to halt.

In certain industries, they already have.

According to an article posted on Investor’s Business Daily, recent Labor Department data shows that job creation is actually on the decline, at its slowest pace in at least five years, specifically in the leisure and hospitality sector. Chicago had their slowest year of job growth in the leisure and hospitality sector since 2009. Employment gains from October through December of 2015 averaged less than half the pace seen in 2014 at just 1.1 percent. In addition, increasing labor costs may drive businesses to increase their prices, if they wish to continue to seek profits, which in turn may negatively impact the consumer. Specifically in the fast-food industry, the Federal Reserve Bank of Chicago stated that if minimum wage is increased, fast-food restaurants would pass almost 100% of their increased labor costs on to consumers.

There’s no doubt that the increase of minimum wage will create a ripple effect felt by customers, job seekers, and employers.

Employers, particularly small-businesses located in areas near Chicago, California and New York, should begin analyzing whether to compensate their employees to match the local minimum wage hikes, especially if the trend of “employees not-as-willing to work for a lower wage” heightens and leads employees to migrate to companies and or locations that will.