In restaurants and hair salons, hotels and taxicab companies, tipping is part of the everyday practice of doing business.
But as much as employees love receiving tips, business owners would rather avoid the headaches of creating tip pools, calculating tip payouts, and keeping accurate records, for both the IRS and other government agencies that oversee how and when these funds can be collected.
As there has recently been more action in the courts concerning the Fair Labor Standards Act requirements for tipped employees, this seems like a good time to review the current laws on who can participate in tip pools and whether certain deductions may be made from tips.
1. Minimum wage is required – but can also be avoided
Employers are allowed to take a “tip credit” for employees who regularly receive tips, allowing them to reduce their hourly salary to as little as $2.13. This may be acceptable only when combined income from wages and tips is equal or above minimum wage, and when all tips go into a tip pool.
2. What constitutes a tipped employee?
A decision handed down by the U.S. Court of Appeals for the Fifth Circuit stated that any employee could be included in a tip pool if it can be expected that the customer intended the employee to receive a portion of the tip. But how can you be sure of that? You can’t, of course, so some businesses try to clarify the designations by only including employees that have some direct contact with customers. In other words, if you serve the cheesecake to the customer’s table, you’re in the pool. If you put the whipped cream on top of the cake back in the kitchen, you may be left out.
3. Can employers deduct fees from tips paid with a credit card?
Another Fifth Circuit decision decided that employers could retain 3.25% of tips paid by credit card. Some restaurant owners tried to take even more, to offset the costs of purchasing and using equipment that processes credit cards. The court said no.
Tip Processing Made Easier
Given all of these other considerations, business owners can benefit from anything that makes the tip calculation and payment more accurate and less time-consuming. That’s TIPS by Cliq®. More than just a tip reporting system, it’s a simple, easy to use solution for owners/managers that also provides tip distribution to employees on a VISA® payroll card.
Find out more about TIPS by Cliq®
*Check your states wage and hour laws.