Legal Tips: When Dealing With Employee’s Tips

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March 28, 2014
Legal Corner
Nichole Hair

While years ago it was common for someone to ask if a business accepted credit cards, today, it is typically a foregone conclusion that a person will pay electronically. However, as odd as it sounds, cash may be making a comeback. In that same vein, most businesses have gone to a point-of-sale (POS) system for everything from allowing employees to clock in/out to settling customer payments. While POS systems have many uses, there are some important legal ramifications that companies need to be aware of when using this technology with tipped employees.

Under the definition of the United States Department of Labor (DOL), tipped employees are “those who customarily and regularly receive more than $30 per month in tips.” These tips are the property of the employee, and the employer is prohibited from using an employee’s tips for any reason other than as a credit against its minimum wage obligation to the employee or in furtherance of a valid tip pool. Due to the wide expansion of electronic payment, the DOL has clarified the idea that the tips are solely the property of an employee and defined the employer’s obligation of paying out tips when a customer uses a credit card.

Credit Card Tips
According to the DOL, where tips are paid on a credit card and the employer must pay the credit card company a percentage on each sale, the employer may pay the employee that tip, less that percentage. For example, if an employer is required to pay a 2 percent service charge on all credit card transactions, the employer may reduce the amount of an employee’s tip from a credit card by 2 percent.  However, this service charge on the tip may not reduce the employee’s wage below the required minimum wage. Further, the amount due the employee based on the credit card tips must be paid no later than the regular pay day and may not be withheld while the employer is awaiting reimbursement from the credit card company.

Service Charges
Another legal consideration with POS systems is seen in compulsory charges placed on customers by the business. With the new year came new Internal Revenue Service rules on automatic gratuities that may change how restaurants handle tips for large parties. The IRS’ revised Ruling 2012-18 draws a sharp distinction between tips and service charges. In systems that automatically employ a compulsory charge, the employer cannot consider such charge as a tip. For example, if a restaurant POS system automatically places a service charge of 15 percent of the bill on large parties, this charge is considered part of the employer’s gross receipts and cannot be counted as tips received by the employee. While this service charge may be used to satisfy the employer’s minimum wage and overtime obligations under the FLSA, it cannot be used to calculate whether an employee fits the definition of a tipped employee. Maybe even more important is the idea that these compulsory charges must be taxed as regular wages and are subject to payroll tax withholdings. If an employee receives additional tips above the service charge, such tips may be considered in determining whether the employee is a tipped employee and applied to the employer’s tip credit. Though this policy is not a new one, having been issued in June 2012, the implementation had been delayed until 2014 to give restaurants time to comply.

Tip Reporting
In calculating tips, many restaurants allow their tipped employees to self-report tips. With the increased usage of electronic payment, record keeping of these tips is more important than ever. Employers are responsible for their share of the FICA tax on all tip income of their employees, including any tip income that such employees did not report to the IRS. Based on the increased usage of credit cards, the IRS has gone to an automatic estimation system to determine what the reported tips of a tipped employee should be. In other words, if an employee’s credit card tips are normally around 15 percent, according to the IRS, the employee should be reporting 15 percent of his or her cash sales as tips. If employees report lower cash tips than the credit card tips, the employer is likely to be audited and required to pay the difference based on the IRS’ estimates.

If employers have a POS system, employers most likely have the ability to track sales and credit card tips by employee. Most POS systems will also allow employees to enter cash tips each day and run reports, which will analyze this information and provide percentage estimations of tips. This allows employers to ensure they are staying within the automatic estimation set up by the IRS. 

Nichole Hair is an attorney in the employment group at Hall Booth Smith, PC, in Atlanta. She can be reached at nhair@hallboothsmith.com or (404) 954-6952.

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