Tips understandably consume little thought for the average diner after departing a restaurant but should be a matter carefully considered by the restaurant’s owners and management. Tips must be managed correctly to comply with legal requirements and to avoid fines and lawsuits. Three areas of needed attention are particularly acute for employers – minimum wage requirements, “tip pooling,” and tax reporting.
Minimum Wage for Tipped Employees
Under Arizona law, employee minimum wage currently increases by $.50 per hour annually. For 2019, it is set at $11 per hour, but may be higher in certain communities, like Flagstaff, which currently requires a minimum wage of $12 per hour. These rates represent a sizeable premium over the federal minimum wage of $7.25 per hour. A “tip credit,” permitted by federal and Arizona law, can be essential in assisting employers by allowing earned tips to count towards the minimum wage requirement. Arizona law limits the credit to a maximum of $3 per hour, so employers may pay tipped employees a wage of $8 per hour ($9 per hour in Flagstaff); however, this is only permissible if those employees are, in fact, earning at least $3 per hour in tips during their shift. Employers need to be especially mindful of times when employees may not be earning tips at all, such as during training or company meetings. It is the employer’s responsibility to ensure that tipped employees are earning the required minimum wage during their shifts, and to make up any deficiency when tips fall short.
Tip pooling permits employers to spread the tip credit amongst a greater number of employees by partially distributing tips earned by the wait staff to others, such as bussers and bartenders; however, this is very limited under Arizona law. Only employees who “customarily and regularly” receive tips can be included in a tip pool for purposes of the tip credit. This requirement departs from a recent change in federal law, which permits broader tip pools. One consistency between Arizona and federal law is that employers, managers, and supervisors may never be included in the tip pool. All tips must be paid out to the employees who earned them or who are eligible by law to participate in the tip pool. Employers who violate this requirement may face substantial fines and penalties for non-compliance.
Reporting to Taxing Authorities
Employers must report earned tips to the appropriate federal and state taxing authorities. The Internal Revenue Service (IRS) mandates that employers report tips on employee W-2 forms, withhold taxes, and make employer contributions for earned tips. Employers who claim a $3 per hour tip credit, but do not report any tip earnings to the IRS, are setting themselves up for audits, fines, and potential legal claims.
Employers should always be thoughtful in managing employee wages, including tips and other key pay nuances. Seeking advice from an experienced employment attorney can help ensure compliance with all wage and hour laws, and lower the risking of heavy fines and potential lawsuits.
Chris M. Mason is a member at Jennings, Strouss & Salmon, P.L.C. Mason counsels employers and management on all aspects of labor and employment law, including collective bargaining and union organizing; restrictive covenants; employment discrimination; sexual harassment; whistleblowing; retaliation; wrongful termination; personnel policies; reductions in force; trade secrets; restrictive covenants; duty of loyalty; drug and alcohol testing; wage and hour; and other state and federal laws, rules, and regulations.