By Michelle Anderson, Attorney, Fisher & Phillips, LLP (New Orleans)
The following article generally discusses tipped
employee rules that an employer may adopt for employees. The article is not
intended as legal or tax advice, and any specific question regarding a
particular policy or rule for your workplace
should be addressed with legal counsel to
ensure compliance with all applicable federal and state laws.
The simple act of tipping has become a hot bed
of legal concern for the restaurant and hospitality industries. As the Department of Labor’s enforcement
efforts continue to grow and private wage and hour lawsuits increase, these industries
are prime targets for tipped employee violations. To further complicate matters, effective
January 2014, the IRS implemented new guidelines for tips and service charges. While
customer generosity should be encouraged, businesses in these industries need
to ensure compliance with applicable laws.
The
Ground Rules:
All non-exempt employees must be paid the
minimum wage under federal and state law. Under the federal Fair Labor
Standards Act (FLSA), tipped employees are those who regularly receive more
than $30 per month in tips. The tip credit provisions of the FLSA permit an
employer to pay tipped employees no less than $2.13 per hour in cash wages and
take a “tip credit” equal to the difference between the cash wages paid and the
federal minimum wage. The tip credit may not exceed the amount of tips actually
received and, under the current minimum wage, may not exceed $5.12 per hour. For
example, under federal law, an employer can pay a tipped employee $2.13 per
hour and take a “tip credit” of $5.12 per hour, provided the tipped employee
makes sufficient tips to cover the tip credit. If the employee does not earn
sufficient tips for the tip credit, the employer must make up the difference to
ensure the employee receives minimum wage for all hours worked. Employers must
keep clear records to demonstrate proper application of the tip credit.
The use of tip credit can also be complicated
by state laws. Some states forbid the use of tip credit, while others impose
significant record-keeping and/or notice requirements on the use of tip credit.
Louisiana currently follows the federal law, which requires that employees be
notified in advance if the employer will take a tip credit. Written notice is
recommended.
Some employers might be tempted to not require
employees to report tips under $30 per month, or report tips beyond what brings them up to the
amount of the tip credit taken. Both of
these practices are flawed and could create tax liability.
The definition of a tipped employee for
purposes of IRS reporting differs from the FLSA. The IRS defines a tipped employee as one who
earns $20 or more per month in tips. Employees
are required to report to their employer the total amount of tips they receive.
Employees must provide the employer with written reports by the tenth of the
following month. Employees who receive tips of less than $20 in a calendar
month are not required to report their tips to their employer, but must report
these amounts as income on their tax returns and pay necessary taxes.
Therefore, even if an employee is not deemed a
“tipped employee” under the FLSA, per the IRS the individual may still be
considered a “tipped employee” for purposes of reporting the income generated
by tips. Hence, the best practice is to simply
require employees to report all tips.
