This article is and will continually be updated and added with additional states and regulations. In part one, we will examine the tip regulations and legality for Texas, California, and Washington.
In a series of events that have unfortunately become quite common, a Nashville bar is one of the latest to join the long list of restaurant lawsuits in 2020 – merely a year after opening. To this day, millions of dollars have racked up due to retaliation by employees against unpaid owed tips or unfairly split wages that came from tip sharing. So what’s the issue behind the lawsuits that so many restaurants just can’t quite figure out? Let’s examine how to maintain proper tip distribution that’s always compliant with national tip pooling laws and minimum wage requirements.
2018 Changes to National Tipping Laws
One of the biggest changes in the industry has been an increase in stricter regulation as a result of new legislation passed in 2018 to protect both tip employees and business owners alike. In 2018, Congress passed the Tip Income Protection (TIP) Act in order to protect tipped employees from tip fraud and that maintain minimum wage requirements be met. The bill reads:
“This bill amends the Fair Labor Standards Act of 1938 with respect to the definition of wage to provide that except in the case of the pooling of tips, all tips received by any employee, including an employee that is not a tipped employee, shall be the property of, and retained by, the employee, including in the case of an employer that pays a tipped employee a cash wage that equals or exceeds the minimum wage.”
Understanding Federal Tipping Regulations
The biggest goal of the TIP ACT was to make tip distribution profoundly clear: the bill outlines exactly who gets the tips and who cannot benefit from them under any circumstances. There are a few key takeaways that businesses need to understand in order to comply with the new federal tipping law:
It is illegal not only for business owners but also for managers and shift supervisors to participate in tip sharing or tip pooling. Furthermore, if a business owner is using a tip credit as part of their employees’ minimum wage requirements, they are only allowed to pool the tips amongst the Front of House (FOH) team.
That said, as of 2018, if an establishment wants to include Back of House (BOH) staff – those who don’t have direct interactions with customers – in the tipping pool, then a business can do so provided the owner does not use a tip credit structure to meet the employees’ minimum wage requirements.
The National Employment Project also explains that the 2018 law “provides a private right of action (i.e., the right to bring a civil lawsuit) to recover stolen tips, any short-fall in the minimum wage, and liquidated damages (i.e., an additional amount equal to the stolen tips).”
The National Minimum Wage
As of 2020, in order to remain compliant with federal minimum wage requirements, employees must be paid $7.25 hourly – in the case of tipped workers, this number drops down to $2.13 for states that allow tip credits. However, if the state in which you run your business has a higher minimum wage, then that number takes precedence: business owners will have to pay their tipped employees the highest amount.
Understanding all of the finely printed details of tip pooling laws will help you make sure that whether you’re an employee or a business owner, your operations run smoothly when it comes to meeting the minimum wage and maintaining good tipping practices – no matter in which state you live.
Knowing the basic national tipping laws will help you avoid legal issues down the road and will keep you and your team focused on what matters most: providing excellent service to your customers.
Review and Regulations of Specific States:
National laws hold precedence, however state laws vary significantly. At TipHaus, we value our customers and aim to bring you the most up to date legislation below. Please be aware that municipal and even city ordinances can be in effect, so these are subject to change depending on restaurant location.
Texas: Tip laws and regulations in the lone star state are fairly straight forward. Tip credits are allowed, and the minimum wage of the state is based upon the federal minimum wage. This means that as long as employees earn $7.25 per hour after tips, the restaurant is only liable for 2.13 an hour. In addition, you are allowed to charge employees for credit card tip fees, meaning that anytime a credit card is swiped and the merchant processing fees are applied, this is allowed to be removed from the server's take-home.
Washington: WA state has several unique elements, and several notable cities that go above and beyond national wage requirements. For starters, Seattle is subject to a $12.00 statewide minimum wage, with Seattle increasing to up to $15.00 depending on number of employees. Washington laws are more favorable for employees than Texas, and therefore do not allow tip credits. This means that tips cannot count toward minimum wage. However, Washington does allow for credit card processing fees to be reduced from final take-home, often accounting for 1-3% in total reduction.
In California, the minimum wage is also $12.00 per hour, and certain cities are known to rise above. Something important to note in California is that back-of-house employees are never allowed to participate in tips, though tip-distribution is legal for "chain-of-service" employees. The golden state has several unique laws, mostly designed to protect the employees, and therefore do not allow tip credits nor credit card tip fees. This means that tips cannot count toward minimum wage, and merchant processing fees cannot be subtracted from an employee's final take-home.