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Your Employees Get Tips, So Should You

Some tips for complying with state and federal wage and hour laws for tipped employees.

At the beginning of this year, I explained to a young child how important it is to leave a tip for your waiter/waitress,  I explained that a tip is part of his/her pay, helps to pay his/her bills, and that you might choose to leave a larger tip for excellent service.  I'm pretty sure that the message got through, because each time we've eaten out since then, that same child calculates the tip and exclaims his rationale -- "She was really nice," "He brought lots of drinks," "She smiled a lot" -- for an extraordinary tip.  I can't help but wish that employers gave tips this much attention.

If you employ individuals who receive tips as part of their compensation, it is imperative that you understand your obligations with regard to minimum wage calculations, overtime pay and other tipping policies.  Violations of wage and hour laws related to employee tips can have significant consequences to your immediate bottom line as well as to your reputation.

Here are a few important points to consider:

-- In Kentucky, you are required to pay your employees at least regular minimum wage, unless they are engaged in an occupation in which more than $30 dollars per month is customarily and regularly received in tips.  For those employees, you may be able to pay a minimum wage of $2.13/hr (adjusted with the regular federal minimum wage), but only if records can establish that for each week in which you pay this reduced rate, the employee’s salary plus tips is not less than the regular minimum wage.

-- You may not require your employees to remit any gratuity to you, the employer, except for the purpose of withholding amounts required by state or federal law.

-- Though tipping pools may seem like a great way to share the love amongst your service employees or to even out customer distribution (seating sections, number of tables, number of customers, preferred hours, etc.), Kentucky law prohibits involuntary tipping pools.  Voluntary tipping pools are permitted, and you may inform your new employees about the customary tipping arrangements followed by most employees at your company.  You may also provide a place for safekeeping of funds placed in a voluntary tipping pool, but there are specific laws and regulations which must be honored with respect to segregation of funds and examination by pool participants.

-- It is important that you keep good records of your wages paid, including a record of cash wages paid to a tipped employee.  Again, you must be able to show that your tipped employees have received at least the regular minimum wage after consideration of tips and salary.  If you need employee assistance to get the information you need to keep the requisite records, make sure your written policies and procedures are clear, and make sure you train tipped employees on such procedures and record keeping.

-- Tipped employees are generally not exempt from overtime wage and hour laws, so it is equally important that you are aware of applicable laws and regulations surrounding overtime compensation.

Finally, to the extent possible, make sure your tipped employees feel they are being treated fairly.  Explaining employees’ rights, implementing and following clear policies and providing an avenue for grievances can help to create this sense of fairness.  While this is more of a practical point than a way to avoid technical legal violations, it is nearly impossible to overstate the effect that a well-placed social media campaign by an angry employee can have on your business.  Recently, Lynn's Paradise Cafe, a local restaurant favorite in Louisville, Kentucky learned this lesson first-hand.  After allegedly implementing a new policy requiring that tipped employees come to work holding at least $100.00 in cash at all times, including at the start of their shift, in order to "tip out" employees.  A recently terminated employee complained on the Facebook page of a local news channel about her former employer's policy, claiming that she could not afford to comply with the policy.  This, of course, invited several comments from the news channel's followers, some regarding the illegality of mandatory tipping pools and some generally bashing the restaurant.  While the truth about Lynn's policies and practices not fully known, there is little doubt that the restaurant's reputation was harmed by the social media posts.  Lynn's closed abruptly shortly thereafter, after twenty-two years of business.

If you employ individuals who receive tips as part of their compensation, it is important that you fully understand these points, as well as several other relevant state and federal wage and hour laws and regulations.  You may wish to consult with counsel to make sure that you haven't made any inaccurate assumptions about how to pay your tipped employees.

This article is intended as a summary of federal or state law and does not constitute legal advice.

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