Tips are a vital part of restaurant culture--and in many cases, the first thing that comes to mind when employees talk about how much they make. For restaurant owners and managers, navigating tip requirements correctly is essential. Asheville's booming food scene means that restaurants in the area may ultimately invite more scrutiny than those outside it--and that means that your restaurant must be in compliance with tip credit and tip pooling rules in order to avoid potential fines and other financial challenges.
Do tip credit and pooling rules really matter? If you're trying to keep your restaurant running smoothly, yes. Even if you have "always done things" a different way, failing to follow those rules can open you up to liability--not to mention introducing other possible risks.
If the DOL audits your restaurant and discovers that you have not been accurately paying employees--including adhering to the rule that employees cannot lose more than 15% of their tips as part of a tip pool--you may end up liable for back wages. Furthermore, employers must adhere to tip credit rules, which state that the employee must make a minimum of $7.25 per hour, once tips are calculated. In the end, if you fail to follow those rules, you can end up paying employees more than if you had stuck with the rules from the beginning.
Asheville's tight-knit hospitality community means that people share information. Not only do servers and other tipped employees let others know whenever they face problems with tipping accuracy, word gets around--and that can mean a serious impact to your restaurant. Average consumers are increasingly aware of the challenges faced by tipped employees, and they may choose not to patronize a restaurant if they know employees aren't receiving fair compensation.
Imagine that there is a brewery that requires servers at its tables to rely on tips. Bartenders are also allowed to receive tips--especially from those sitting at the bar directly--but do not rely on those tips for their wage, because they are paid above minimum wage for their work. Because of that, both bartenders and servers are included in the brewery's tip pool. However, over time, the tip pool has expanded to include other employees--including managers, which is a direct violation of North Carolina's tip pooling law. Not only that, bartenders to receive much lower tips than servers at this brewery. When the DOL comes in, they find that servers are actually only receiving about 60% of the tips they were given by their customers – not the 85% that North Carolina’s law requires.
Due to the DOL investigation, the brewery faces thousands of dollars in back wages to the servers that did not receive the right amount of their tips. Many servers quit once they realize that the brewery is not compensating them the way they should or creating meaningful change to its employees – and the brewery has trouble filling those roles, since those servers share their experience. Furthermore, it quickly notices a decline in business as word gets around town. Ultimately, the brewery does not shut its doors, but it’s no longer the popular spot it once was.
Current federal tipped minimum wage – that is, the minimum wage for employees who customarily receive tips – is just $2.13 per hour. Regular federal minimum wage sits at $7.25 per hour. That’s a $5.12 per hour difference – and one that tipped employees generally make up for in tips.
Employers must provide their employees with at least minimum wage for all shifts worked. In some cases, employers may have to make up part of the difference for a shift, especially if tips are slow or the employee is new to the job. Suppose, for example, that a server earns an estimated $20 per shift in tips. With minimum wage for tipped employees set at $2.13 per hour, an employer may need to carefully walk through those numbers to make sure the employee is making at least minimum wage.
Over an eight-hour shift, $2.13/hour translates to $17.04 in earnings. With $20 in tips, the employee’s total earnings go up to $37.04. Divided over the eight hours of the shift, that makes the employee’s hourly wage $4.63 – under federal minimum wage for tipped employees. The employer may need to make up the difference: a standard eight-hour shift at federal minimum wage would mean a $58 wage for the shift, which means the employer may owe the employee an additional $20.96 per shift.
North Carolina follows the federal guidelines, which means there is no state-specific tipped rate. However, North Carolina does clearly define what counts as a tipped employee: an employee who customarily receives tips as part of their role. That covers servers, bartenders, and others who work within a service industry position.
Under this law, tips belong directly to the employee, not the employer. While they can be included in a tip pool, an employee who receives those tips should get at least 85% of the tip.
A tip is given at the sole discretion of the customer, not a number set by the company – though some restaurants may institute mandatory gratuity in some situations. Tips are also given directly to the employee or whoever else the customer specifically wants to give them to.
Employers must notify employees in writing if they plan to claim a tip credit as part of their wage. Furthermore, employees must report any tips over $20 per shift, and employers need to keep records of those tips and pay taxes on them appropriately.
Tip pooling and tip sharing are dramatically different systems – and understanding how those things work can prove essential in protecting against audits and potential regulatory fines.
Tip Pooling: All tips are put into a communal “pool,” and all tipped employees are tipped out of the pool based on a predetermined system. The percentage of the pool received by each employee may be based on their hours worked, the “points” they have acquired due to specific activities, or another system determined by the restaurant.
Tip Sharing: In a tip sharing system, servers and other tipped employees have to share a percentage of their tips with non-tipped employees in the restaurant.
Tipped employees can participate in tip pooling arrangements. That may include servers, bartenders, hosts, or bussers. Other employees – including management team members and cooks – may not be eligible to participate in those arrangements under NC law. Furthermore, employers cannot keep any percentage of those tips for themselves.
In a 30-person restaurant, 10 members of the team are servers. At this restaurant, only servers participate in the tip pool; hosts and kitchen staff are excluded. Over the course of the hours the restaurant is open, the 10 servers work the same number of hours. They obtain $3000 in tips, so each one will receive $300 in tips for the day.
There are a number of potential mistakes that can trigger audits and complicate the tip management process.
By avoiding these mistakes, you can keep your restaurant running more smoothly and avoid risk.
Employees need to accurately report cash tips in order to keep up with tax and wage purposes. Often, employees receive cash tips immediately, so they can take those home at the end of their shifts. Employers, however, are responsible for processing card tips and distributing them to employees. While employers can deduct the actual cost of processing the tip itself, they cannot deduct the cost of processing the full credit card transaction, nor can they keep any portion of that tip for themselves (though they can be included with tip pooling or sharing arrangements).
Create a reconciliation checklist for daily and weekly audits to make it easier to keep up with that data.
Breweries and bars can face a number of unique challenges when navigating the tip credit process.
By correctly assessing and navigating those traps, bars and breweries can ensure that they are paying tipped employees appropriately.
Are you building a compliant tip policy for the first time? Make sure you include these essential elements.
Your tipping policy should state the DOL standards and your efforts as an employer to meet them. Include minimum wage and tip credit requirements as well as the definition of tipped employees.
If you use tip pooling, make sure you lay out the mechanisms for tip pooling and what employees can expect.
When employees have questions about their tips or want to dispute the amount they have received, you need a clear process in place. Clearly lay it out as part of your tip policy.
Clearly lay out when you will review your tip policy, including what time of year and any updates that may be necessary.
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Correctly establishing and navigating your tip strategy can be a challenge. We’re here to help with all your accounting needs, including compliance, reporting, and record-keeping. Reach out today to learn more about how we can help.