The restaurant industry has traditionally been a hot bed for wage and hour violations. Restaurants across the country have recently attracted a lot of attention from the Department of Labor (DOL) due to investigations of possible violations of the Fair Labor Standards Act (FLSA), which regulates wage and hour requirements on the federal level. In arecent crackdown in Portland, Oregon, the DOL discovered FLSA violations in an incredible 79% of the restaurants investigated. Many violations in the restaurant industry stemming from confusion and complications regarding tipped employees. Though many servers and bartenders receive an hourly wage below the standard minimum wage, their hourly wages plus tips must add up to at least the mandated minimum wage. Furthermore, many restaurant owners regularly miscalculate overtime rates for these employees as well.
New Tip Regulations for 2014
Distinguishing tips from wages has also been a controversial practice for both wages and for tax reporting purposes. Because of the tax implications, the Internal Revenue Service (IRS) released anadvisory bulletin last year that goes into effect as of January 2014, clarifying the tip-wage distinction for restaurant employees. The bulletin states, in short, that any mandatory gratuities added on to a restaurant bill should be counted and taxed as wages, not tips. Specifically, the bulletin reasons that a tip is defined as the following:
A payment by a customer free of compulsion
The amount of the payment is determined freely by the customer
Payment must not be negotiated or required by an employer’s policy
The customer may decide to whom they directly give the payment
Mandatory gratuity does not fit any of these four requirements for “tips.” Therefore, the IRS has deemed that mandatory gratuity is instead a service charge, which would be considered a wage under federal tax guidelines.
Why is Wage v. Tip important?
Currently, service industry employees report their own tips to their employer for tax withholding purposes and employers must not withhold taxes on any unreported tips. However, since mandatory gratuities are considered wages, employers must keep track of all of these gratuities, withhold taxes, and report them to the IRS. Any failure to do so could result in penalties. Additionally, if an employer does not factor such wages from mandatory gratuity into an employee’s hourly rate, overtime compensation rates may be inaccurately low. Not providing enough overtime pay can result in FLSA violations.
In response to the IRS bulletin, many restaurants are choosing to eliminate mandatory gratuities, even for large parties. First, most restaurant owners do not want to deal with the additional tracking of the gratuities. Furthermore, because the Department of Labor is already keeping a close eye on restaurants, looking for possible FLSA violations. Therefore, there is a greater chance that violations be discovered and will result in claims and penalties against the restaurant.
If you work in the service industry, you should know that you are entitled to all mandatory gratuities and must pay taxes on those wages as of January 2014. If you believe your employer is not complying with the new laws or with any other tax laws, contact the Pershing Square Law Firm to discuss a possible case.