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Employer Responsibilities for Tip-Based Compensation

Employee Tip CompensationIf you employ people in positions that commonly receive tips or gratuities, it’s important to stay abreast of your responsibilities as an employer.

Requirements for taking tip credits
The current federal minimum wage is $7.25 per hour; employers may claim a tip credit to pay $2.13 per hour if employees make up the difference through tips. If an employee doesn’t make enough in tips to reach minimum wage, the employer must make up the difference.

Employers must provide oral or written notice to their employees that they are taking this tip credit. We recommend communicating this information in writing with a place to sign and date these employee notifications.

Tip pooling
Recent regulations allow employers who don’t take a tip credit to create a pool that shares tips with “back of the house” employees, such as cooks and dishwashers. If a tip pool is being used, employers must fully redistribute the tips within the pay period.

According to the Fair Labor Standards Act, employers, managers, and supervisors are not allowed under any circumstances to keep employees’ tips, including through tip pools. In fiscal year 2021, the US Department of Labor (DOL) identified nearly $35 million in back wages owed to more than 29,000 food service industry workers, with violations commonly related to employers retaining tips. In one case, investigators from the DOL found that a Texas barbecue chain owes $230,353 in back wages to 274 employees after management illegally kept tips from employees.

Recordkeeping requirements
Here are some basic reminders about reporting tips to the Internal Revenue Service (IRS):

If you have questions about tip allocation and reporting, MarathonHR is here to offer our expertise, including our human resources solutions for the restaurant industry.

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