By Evan Rosen

Hospitality employers continue to get hit with class action lawsuits alleging that they are unlawfully taking the tip credit for their employees.  Under federal law, and the law of most states, an employer may pay less than the minimum wage to any employee who regularly and customarily receives tips.  The difference between the minimum wage and the hourly wage rate is called the "tip credit."  

This compensation system, when administered correctly, has the advantage of saving employers a significant sum of money.  But employers must implement several safeguards to avoid potential liability.  Indeed, if the employer’s tip policy is unlawful, employers will be liable, not only for the amount of tips that were wrongfully distributed, but will also be on the hook for the entire tip credit for all tipped employees, and under some state laws, liquidated, punitive, and/or treble damages.

Here are some tips (no pun intended) to ensure that your company is compliant.

1) Provide written notice to all employees for whom your company is taking a tip credit.  Among other things, the notice should inform the employees of their hourly wage rate, the amount claimed by the employer as a tip credit, and that all tips received by the employee are to be retained by the employee (except for a valid tip pooling arrangement).

2) Regularly audit your payroll to ensure that that all employees for whom your company is taking a tip credit is earning at least minimum wage when tips are included into their overall compensation.

3) Ensure that all tipped employees are earning at least $30 a month in tips.

4) Do not allow tipped employees to spend more than 20% of their shift performing non-tipped related work (i.e. side work, room set up, etc.).

5) Employees with managerial responsibilities should not participate in the tip pool.  Keep in mind it is the individual’s actual duties that are dispositive, not their job title.

6) Back of the house employees (expeditors, dishwashers, stewards, cooks, etc.) should typically not receive tips.

7) Be mindful of state law.  Some states, like Massachusetts, have their own unique tips law.  Other states, like California, prohibit employers from taking a tip credit.

8) If you reduce tips by a percentage paid to a credit card company, be sure that such reductions only occur for credit card tips and not for cash tips.  Likewise, ensure that any such reductions do not bring the employee below minimum wage.

9) If your company is taking a tip credit, the regular rate for calculating overtime payments of a tipped employee should be based on the minimum wage, and cannot be based on their lower hourly wage rate. 

10) Train your managers and audit your policies and procedures at least once a year.