You might not know this, but the government is killing restaurants over tip distribution. What? How you’re paying out tips can get the man breathing down your neck? Yep. Over the last 12 months over 500 restaurants have found themselves involved in legal disputes over tipping. Here some of the many examples:
Tipping Back of House Employees:
Small Town Virginia Favorite ‘Mac and Bobs’ files for bankruptcy after owing over $1 Million in penalties for tipping dishwashers.
How Restaurant Service Charges are Distributed:
Seattle Celebrity Chef and Alaska Airlines inFlight Meal Chef Tom Douglas pays out over $2.4 Million for tipping violations
10% Service Charge Not Agreed Upon by Employees:
Maru Sushi in Detroit, an awarded restaurant for asian fare, pays out $1.5 Million for tip violations.
How Overtime Employees and Tips are Handled:
Mark Whalberg’s restaurant Whalburgers pays an undisclosed penalty for tip violations and wage violations.
What’s happening? Well for starters, the government likes to involve itself in places it doesn’t belong. This guarantees job security for otherwise unemployable legislators: “We write laws so complex you need to hire me to decrypt them for you.” Unfortunately someone has to foot the bill, and in this case it’s the SMB.
The legislative spin is that all this is done to protect the poor, abused employee. In their minds the big, bad employer is not properly accounting for nuances that determine who can and can’t be tipped, and how much they’re truly owed. Almost all of the lawsuits center around three major issues:
- Understanding the differences and how to handle tip-pooling and tip-sharing
- Managers or owners participating in or benefitting from tips
- Tip credit impact on minimum wage payments
When complexity rears its ugly head it’s usually a good idea to reach for the software hammer, which is precisely what TipHaus has done. As TipHaus’ CEO Leif Magnuson tells us, “The POS really is the best place to start handling tip logic. The POS contains the requisite data to build a solution that appeases legislators and makes the tip process much smoother for operators.”
Well, as we all know on this blog, POS companies often can’t even build POS right. Which is why TipHaus has seen a rapid influx of merchants looking for a solution.
It has always been tough to run a restaurant, and in an incredibly competitive industry, it is really hard to stay on top of legislation when you are working 12 hours a day, 7 days a week. It’s even more difficult when you are seeing restaurants trying to do the right thing yet still being forced into bankruptcy.
Leif Magnuson, CEO TipHaus
Here are Leif’s pointers to restaurants who find themselves befuddled.
Understanding the differences and how to handle tip-pooling and tip-sharing.
Tip-pooling should be used for employees who are generally tipped as part of their jobs. Think FoH employees, whether or not they are the point of transaction. Bartenders, bussers, servers, hosts and hostesses would all apply.
Tip-sharing should be used for employees in support roles, those that are BOH. This includes kitchen staff, but also individuals such as dishwashers or those performing custodial duties.
Consider drafting tip pooling policy in writing, and having staff understand and agree. Tip pools are legal in most states, but they must be presented, understood, and sometimes drafted directly by staff, and they must adhere to common tip practices.
In short, Tip Pooling happens with FoH employees receiving an equal share (proportionate to time worked or sales during a cycle/shift) and tip sharing is based on a set percentage and can include BoH individuals. Example: 2% of food sales made by servers is sent to cooks.
Management Participation in tips.
Why this is still a misunderstanding is a bit of a mystery, as it is pretty straightforward. When it comes to managers and owners, don’t touch tips. Ever. If you are in any position of authority that does not directly serve the customers in some manner, stay far away. Many restaurants try to find ways around this with clever fees or interesting clauses, but this is where legal action is almost sure to begin, and restaurant owners, even when disclaiming this is done, still always wind up on the losing side of legislation.
Tip Credits and Minimum Wage.
Depending on your state, you may not have to pay FoH service individuals minimum wage if they are expected to meet that wage through granted tips. However, if they don’t fulfill the full minimum wage during a pay period, the restaurant does have to cover the difference. This is known as tip credits and is not as simple as it seems.
For example, some states have different classifications for tips, allowing credit card processing fees to be deducted from the tip totals. And in many states, minimum wage is required and tips are simply added on top.
It is important to note that BoH employees CAN NOT utilize a tip credit to meet their minimum wage, ever. BoH can participate in Tip Sharing with allocated percentages, but they must be paid minimum wage as a baseline.
Every state is different, and legislation is constantly changing, but it is important to have tools in your arsenal to help avoid costly fines and penalties. In 2020, with a little common sense and help from simplified tip distribution software such as TipHaus, there is no reason your restaurant or establishment should fear anything regarding legal action and tipping practices. Many of the tip distribution softwares automatically calculate percentages, and some can even make recommendations if it seems like you might be violating any laws in your state. You can avoid issues by making the tip distribution process extremely transparent and by consulting with a legal professional on what rules apply to your organization.
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