While being highly beneficial for employees, tipping can pose a challenge to restaurants. With many laws and taxation rules surrounding the tipping issue, it's easy to feel lost and make unfortunate mistakes.
Calculating, sharing, pooling, and distributing tips is just one part of the process. The other part is staying up to date with the newest legislature. To make sure employees, IRS, Department of Labor, and EEOC (Equal Employment Opportunity Commission) are satisfied without hurting the restaurant's profitability, owners need to stay up to speed with the latest changes.
Let's take a closer look at tip allocation updates restaurateurs have to work with in 2021.
Tip Allocation Explained: Tip Pooling vs Tip Sharing
One of the toughest tasks restaurant workers have to deal with is tip distribution. Since in the majority of situations, servers are the only employees who interact directly with the clients, they are the only ones who get access to tips.
To distribute tips among all service providers fairly, restaurant employees take advantage of two tip allocation methods: tip pooling and tip sharing.
Tip Pooling
Tip pooling involves collecting tips from all tipped employees at the end of the shift and distributing them among restaurant staff in a predetermined manner.
Usually, this tip pool is shared among employees who contributed to it. However, in some cases, non-tipped staff members (food runners, hosts, bussers, chefs, dishwashers) also get a portion of the pool.
Tip Sharing
Tip sharing involves tipped employees sharing their tips with staff that supported them in providing service to the client. For example, a server can share a portion of their tips with a chef, a host, and a bartender.
Unlike tip pooling, tip sharing is less formal. The employer doesn't participate in the distribution process. The percentage of the tips shared with other staff members can differ.
Important: The U.S. Department of Labor regulates tip pooling but not tip sharing.
The FLSA and Tipping
The Fair Labor Standards Act (FLSA) contains regulations that help employees and employers manage tipping systems. Unless there is a format tip pooling arrangement in place, employees have the right to keep all of their tips. They can participate in tip sharing on a voluntary basis.
An employer has the right to pay the federal tipped employee wage (currently $2.13 per hour but the amount can vary from state to state) to tipped employees. Since the current minimum wage is $7.25, the difference ($5.12) must be made up by tips.
This $5.12 is called a tip credit even though there isn't any actual money exchange involved. The tip credit simply means that an employer who pays employees a tipped minimum wage can use tips to make up for the difference between the tipped minimum wage and the actual minimum wage.
In case the valid tip pooling arrangement results in any tipped employee getting less than $5.12 ( or the difference between tipped minimum wage and regular minimum wage) per hour in tips, the employer has to make up the difference. If the amount of tips received by your employees puts their earnings above the minimum wage, you can be eligible for FICA tax credit.
In short, FLSA ensures that tipped employees receive minimum wage regardless of the restaurant's approach to tip allocation.
What Changed In 2021?
In December 2020, the Department of Labor presented new tipping regulations (Final Rule) that were supposed to go into effect on March 30, 2021.
- Employers that don't take advantage of tip credit can implement a mandatory tip tool. The pooled tips can be distributed among employees who don't usually receive tips like chefs, dishwashers, hosts, and the like.
- When an employer manages a tip pool, they need to distribute the tips regularly (at least as often as they pay wages).
- Employers, managers, and supervisors are prohibited from keeping any part of the employees' tips for any purpose even if they don't take the tip credit.
- Establishment of civil money penalties (any employee who keeps tips earned by the staff can be subject to a civil penalty of up to $1,100).
- New record-keeping requirements for employers who don't take tip credit but collect tips in order to manage a mandatory tip pool. Besides collecting regular payroll data, restaurant owners need to do the following:
- Put a notation in pay records to identify all employees who receive tips.
- Maintain records of weekly or monthly amounts reported by employees of tips received (reports on IRS Form 4070 are allowed).
- The employer can take a tip credit for any amount of time a tipped employee performs dual jobs, meaning performs non-tipped and tipped duties simultaneously or for a reasonable amount of time immediately before or after performing tipped duties. This eliminates the previously accepted 80/20 rule.
February and April Delays
On February 26, 2021, the Department of Labor delayed the Final Rule, extending it until April 30, 2021, in order to have more time to review issues of law, policy, and fact raised by the Final Rule before it takes effect.
Two days before the Final Rule was supposed to take effect (on April 28, 2021), the DOL issued guidance, which delayed three parts of the 2020 final rule until December 31, 2021.
Accordingly, today, only the following portions of the Final Rule are in effect:
- Prohibition of employers from keeping workers' tips whether they use tip credit or not.
- Permission for non-tipped employees to take advantage of tip pooling.
- New recordkeeping requirements.
The rest of the rule is scheduled to take effect on December 31, 2021.
Keeping Tabs on the Latest Changes with Payroll Network
The latest changes mean that restaurant owners need to adjust their recordkeeping and reporting practices.
Payroll Network's Restaurant People Cloud is designed specifically to ensure your restaurant's compliance with the latest regulations. From compliance consultations to hiring assistance, we can help restaurant owners stay on top of their game in 2021 and beyond.
To learn more about Payroll Network tools, please contact our team at any convenient time.
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