Regulations on employee tips can be confusing. Here’s a breakdown on three hot topics in tip law.
Tip reporting time for employers: The Internal Revenue Service requires many large restaurants to file an annual form documenting gross receipts for the previous year, along with the total amount of tips employees reported. In recent years, the IRS has stepped up its enforcement against restaurants that fail to file Form 8027. The paperwork also helps the IRS flag low tip-reporting rates. If an establishment’s employees together fail to report tips equal to 8% of the establishment’s gross receipts, the employer is required to “allocate” tips to individual employees whose reported tips fell below 8% of their share of food and drink sales. The allocation process is complex; Form 8027 has the details. For 2019, the form is due March 2, 2020, if filed on paper and March 31, 2020, if filed electronically.
TIP: Remind employees that if they receive at least $20 in tips in a month, they are required to report tips to their employer at least once a month. This applies to any employee, whether they receive tips directly from guests or share in tips received by other employees.
Precautions if you take a tip credit: The federal Fair Labor Standards Act (FLSA) requires employers to pay employees at least the federal minimum wage (or the state minimum wage, if higher). Under strict conditions, the FLSA also allows employers to take a “tip credit” against the wages of tipped employees. This allows employers to “credit” part of an employee’s tip earnings toward the employer’s obligation to pay the employee the minimum wage. Among the important restrictions: The tip credit can never be more than the amount the employee actually received in tips, and the employer must inform employees about what the tip credit is, when it applies and the restrictions.
TIP: You put yourself in big legal jeopardy if you don’t follow the rules for taking a tip credit. Consult with your legal counsel to make sure you understand all your obligations.
Tips and side work: Tasks such as rolling utensils in napkins, refilling salt and condiments, cleaning, and closing down the restaurant—known in the industry as “side work”—have long been an integral part of the tipped occupations commonly found in restaurants. The rules on whether employers can apply a tip credit for time employees spend on side work (during which they earn no tips) have been unclear. For a time, U.S. Department of Labor (DOL) inspectors took the position that an employer couldn’t take a tip credit if an employee spent more than 20% of their time on non-tip-producing activities. That has produced lots of confusion and years of litigation to try to clarify the issue. The DOL’s Wage and Hour Division last year proposed streamlining the rules to reject a quantitative limit on nontipped duties and allow a tip credit for any amount of time an employee performs related, nontipped duties occurring at the same time as his or her tipped duties, or for a reasonable time immediately before or after performing tipped service.
TIP: Stay on top of this issue. Our Restaurant Law Center filed comments with the DOL supporting its approach and urged even further changes to align the side-work rules with other parts of the FLSA.
Visit Restaurant.org/tips for more resources from the National Restaurant Association and the Restaurant Law Center.