If you are a hospitality business owner, you likely have employees that participate in the receipt of tips and/or tip sharing as a component part of their compensation, as well as employees that do not receive tips as a portion of their compensation structure. Federal wage and hour labor laws apply to both types/classes of employees, and the laws are a bit more complex and nuanced for the employees receiving tips and sharing in tip pooling. Tennessee does not have its own unique minimum wage or tip laws, so Tennessee employers are subject to the federal rules. These laws govern what counts as a tip, the structure an employer must follow when calculating total compensation, and the notices that are required to be given to tip sharing employees.
Tip Credits, Pooling, and Minimum Wage
It is first and foremost necessary to understand that Federal minimum wage laws protect and apply to all employees, whether they are compensated via tip credit or tip pooling or not. Currently, the federal minimum wage is $7.25 an hour, which employees are entitled to earn in full.
Under the Fair Labor Standards Act (FLSA), employers in Tennessee may claim what is referred to as a “tip credit.” Tip credits allow employers to pay tipped employees a base wage that is less than the federal minimum wage (the base wage is $2.13 an hour). However, an employee’s tips must make up the difference so that he or she makes at least minimum wage including tips. Thus, if your employee doesn’t earn at least $5.12 an hour in tips, you must compensate your employee for the difference. This is an average to be taken over the course of the work week.
The Basics – Who Can Be a Tipped Employee?
Tennessee workers receiving more than $30.00 in tips per month are considered “tipped employees.” So, in order for your employee to be eligible to be compensated as a tipped employee, and for you to be eligible for an employer tip credit, your employee must receive at least $30.00 a month in tips.
The following types of employees qualify as tip pool participants: bartenders that serve patrons, wait-staff, Maîtres d’, and other types of employees that serve customers. Typically, workers such as dishwashers, cooks, and those that do not serve customers, do not qualify for tip-pooling arrangements. Also, managers or those with duties similar to the duties of a manager (power to hire and fire, supervise, set schedules and compensation for employees) do not qualify for tip-pooling.
What about workers that wear more than one hat; workers that perform “dual jobs” and spend a portion of their time serving patrons and the remainder of their time doing something else that is not rooted in customer service interaction? If the employee performs duties which would otherwise not qualify for tip compensation/tip credit, but these duties are performed during, a reasonable time immediately before, or a reasonable time immediately after performing traditional tipped duties, the employer can take a tip credit for the traditionally non-tipped duties as well. An example here would be a waiter, waitress or bartender spending a minority of his/her total time cleaning, preparing the bar, preparation of tables and kitchen items, etc.
If the time an employee spends on an ancillary, dual job does not relate to the tipping service duties (the employee spends an hour per shift assisting with the bookkeeping of the restaurant, picking up last minute supplies, or answering the owner’s emails) the tip credit would not apply to dual job time spent.
Legal Notice to Tip Sharing Employees
You must provide a written notice which contains all of the information below to each tipped employee. I recommend providing this at the inception of employ, along with all other employment-related documents provided.
1. Notify the employee of the amount of the base/cash wage being paid to the tipped employee and the amount of the tip credit portion of wages, which cannot exceed $5.12 (the difference between the minimum required cash wage of $2.13 and the current minimum wage of $7.25);
2. Notify the employee that the amount of the tip credit claimed by the employer cannot exceed the amount the tipped employee actually earns in tips;
3. Notify the employee that the tipped employee may retain all tips with the exception of those subject to a valid tip pooling arrangement, which should be limited to employees who customarily and regularly receive tips;
4. Notify the employee that the tip credit will not apply to any tipped employee unless the employee has been informed of the information contained in this notice.
Important Note: If you fail to provide this information to a tipped employee and find yourself in a dispute, you will be required to pay the tipped employee the current minimum wage ($7.25 per hour) and be required to allow the tipped employee to keep all tips received.
Defining What Constitutes a “Tip”: Service Charges, Credit Card Fees, Etc.
What constitutes a tip? The simple answer is that when a customer leaves anything above and beyond the billed charge, plus tax, that amount is a tip. This being said, mandatory service charges and credit card fees can muddy the waters.
Mandatory Service Charges
In Tennessee, if an establishment includes on a bill an amount that is automatically added in the spirit of a tip, gratuity, or service charge, it is treated like a tip and must be paid to the tipped employees. However, please note that per IRS rule, any portion of a mandatory service charge that an employer pays out to employees must be treated as wages, not tips. This may be reason enough not to tack on mandatory service charges. This means the employer must treat these amounts as regular wages, withholding and paying Social Security and Medicare (FICA) tax on these amounts. This means that you may not claim a credit against its tax obligations for these amounts (as you can for tips).
What the IRS Says
• Cash tips received directly from customers.
• Tips from customers who leave a tip through electronic settlement or payment. This includes a credit card, debit card, gift card, or any other electronic payment method.
• The value of any noncash tips, such as tickets, or other items of value.
• Tip amounts received from other employees paid out through tip pools or tip splitting, or other formal or informal tip sharing arrangements.
• Four factors are used to determine whether a payment qualifies as a tip. Normally, all four must apply.
To be a tip:
• The payment must be made free from compulsion;
• The customer must have the unrestricted right to determine the amount;
• The payment should not be the subject of negotiations or dictated by employer policy; and
• Generally, the customer has the right to determine who receives the payment.
If any one of these doesn’t apply, the payment is likely a service charge.
What are service charges?
• Amounts an employer requires a customer to pay are service charges. This is true even if the employer or employee calls the payment a tip or gratuity.
Examples of service charges commonly added to a customer’s check include:
• Large dining party automatic gratuity
• Banquet event fee
• Cruise trip package fee
• Hotel room service charge
• Bottle service charge (nightclubs, restaurants)
Generally, service charges are reported as non-tip wages paid to the employee. Some employers keep a portion of the service charges. Only the amounts distributed to employees are non-tip wages to those employees.
The rule applies only to mandatory service charges. For the amount to count as a tip rather than a service charge, all of the following must be true:
• The payment must be entirely voluntary.
• The customer must have the unrestricted right to determine the amount.
• The amount cannot be set by employer policy or subject to negotiation with the employer.
• The customer must have the right to determine who receives the payment.
Credit Card Charges
In Tennessee, if the employer has to pay the credit card company a processing fee, you may subtract a proportionate amount of the tip to cover the employee’s “share” of the fee. For example, if the credit card company charges a 3% fee, you can legally reduce the employee’s tip by 3% as well.
Tip Pooling Wage Violations
The most typical violations are usually in the form of tip pooling compensation flowing to those who are prohibited from sharing in tip-pooling, or those who have the right to share in a tip pooling arrangement not being fairly compensated under the tipped employee/pooling structure outlined herein. Make sure your employee is paid at least minimum wage, even if this results in you having to bridge the gap/make up the difference after adding all tips to the employees base/cash wages. Miscalculating a tipped employees overtime compensation is another common mistake. Remember that overtime shall be calculated on the full minimum wage of $7.25 and not the lower base/cash wage payment of $2.13.
Last modified: March 13, 2020