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How to Manage Restaurant Payroll with Tipped Employees

From the tip credit to tip pooling to no tipping at all, restaurant payroll can be dicey. When the White House passed the “Consolidated Appropriations Act” in March 2018, they made it even more complicated.

So, let’s try to simplify it. The Fair Labor Standards Act (FLSA) enables restaurant employers to take a “tip credit,” which allows them to pay eligible employees less than $7.25, the federally mandated minimum wage. Employers can then use the tip credit to cover the difference.

Per FLSA regulations, restaurants must provide the following information to a tipped employee (e.g. servers, bussers, bartenders) before an employer is allowed to use the tip credit:

  • The amount of cash wage the employer is paying a tipped employee, which must be at least $2.13 per hour.
  • The additional amount claimed by the employer as a tip credit, which cannot exceed $5.12 (the difference between the minimum required cash wage of $2.13 and the current minimum wage of $7.25).
  • That the tip credit claimed by the employer cannot exceed the amount of tips actually received by the tipped employee.
  • That all tips received by the tipped employee are to be retained by the employee except for a valid tip-pooling arrangement limited to employees who customarily and regularly receive tips.


Steep Penalties for Employers Who Withhold Tips

The latest ruling, while rather confusing, is very clear on one thing: Employers may not keep employee tips for any reason, regardless of tip credit. According to the new amendment:

Employers who keep tips from an employee receiving a tip credit can be fined $1,000 per incident and may also be subject to damages above and beyond the amounts that were improperly retained.

Furthermore, the new law once again allows employers to pool tips and distribute them among their workers, as long as the employer also pays the full minimum wage. This would allow operators to require servers to share their tips, essentially giving pay increases to kitchen employees and bussers. This is a reversal of the 2011 ruling prohibiting tipped and non-tipped employees from participating in tip pooling.


How to Improve Tip Reporting Accuracy with Technology

If you’re a restaurant operator and you’re confused by these regulations, don’t worry — you’re not alone. But it’s important to be sure that your workers are making minimum wage, because failing to do so opens up your business to legal action.

Tipped employees are required to report those tips to their employer. As an operator, you need to be positive that these reports are accurate, so you should require that your employees submit a report of their tipped wages every pay period.

How do you do that and ensure that it’s accurate? Tracking this information in spreadsheets only increases the margin for error.

But with solutions like HotSchedules’ Time & Attendance, you can enable your employees to report their tips when they clock out for the day — that way, you can avoid any bad surprises when it comes time to process payroll.

HotSchedules provides managers with reports showing any employees who are below minimum wage, breaking down their required pay and tip shortage amount by week. Through this interactive report, managers can then easily edit employee punches and make any tip corrections in case employees forgot to declare their tips before submitting payroll.

In addition, HotSchedules offers a configurable option to automatically allocate the tip shortfall amount to the employees’ pay to ensure that the minimum wage requirement is met. By streamlining the tip reporting process with technology, operators can ensure they avoid costly fines and keep their employees happy.

If you want to learn how HotSchedules can help you navigate labor compliance, visit


The materials and information included on this page are provided for informational purposes only. They are not intended either as a substitute for professional advice or judgment or to provide legal or other advice with respect to particular circumstances.

HotSchedules recommends that you consult an attorney licensed to practice law in your state for a professional analysis of the employment and other laws that impact your business.


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