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Tipping Service Workers

Tipping service workers is hotter than ever, but failure to understand employment law can land franchisors in hot water.

July 11, 2022

Tipping service workers is hotter than ever, but failure to understand employment law can land franchisors in hot water. Allowing tips makes workers happy and leaves customers feeling like they’ve done something good, but the process requires careful management. If your business lets customers tip, you need to know how to keep everything above board. Laws vary by state, but it’s helpful to know the federal basics and what pitfalls to avoid. The primary federal law governing tipping is the Fair Labor Standards Act (FLSA), which also covers rules regarding minimum wage, hours, overtime, and other work-related conditions. First and foremost, it makes clear that tips belong to employees, not business owners. Franchisors cannot keep tip money, share it with managers, or use it to offset the cost of doing business.

The law allows for a tip credit, which entitles businesses to pay their employees $2.13 per hour, so long as the worker’s full wages with tips total minimum wage or higher. Generally, only full-service restaurants use the tip credit. But if you do, you should know that the Department of Labor created new rules in 2020. Businesses that use the tax credit can only include tipped workers in a tipping pool and cannot use it to pay back of house staff. Tip pools involve all tips being combined into a single pot and split evenly among a group of employees. It is often the easiest and most equitable way to distribute tip money in restaurants with counter service. This way, workers won’t need to fight over whether to work the counter or the grill, and each contribution to the customer’s experience is considered roughly equal. As cash tip jars fall by the wayside, employers have developed new concerns about credit card processing fees. The Department of Labor has determined that businesses may withhold the amount of the processing fee from the tipped employee. Some states, like California, have stricter laws mandating that the employer cover the processing fee and provide workers with the entire tip. More rules and regulations apply. Tip pools must distribute tips at least as often as they pay wages, and businesses that do not take the tip credit still have record-keeping requirements. Allowing tipping in your establishment has numerous advantages, but the process comes with many responsibilities. Make sure you’re up to date on your state and federal obligations to avoid an investigation — or worse.

West Coast Franchise Law

If you have any questions about franchising, please contact the experienced franchise and business law attorneys at West Coast Franchise Law today at (206) 903-0401 to discuss your situation. Nate Riordan is a 2023 Franchise and Bankruptcy Super Lawyer with over 20 years expertise helping clients achieve their business goals.