Information contained in this publication is intended for informational purposes only and does not constitute legal advice or opinion, nor is it a substitute for the professional judgment of an attorney.
We operate sandwich shops in a couple of states. Although we have tables, we don’t have table service, and customers pick up food at the counter themselves to either take out or seat themselves at our tables. We’re moving to a new online payment platform, which includes an option for customers to include tips in varying amounts. We’re new to dealing with tips, and not sure how this will impact our pay practices. Who do the tips go to? Those preparing the sandwiches in the back? All employees? Are there special minimum wages for those who work at the counter and interact with customers? Can you help?
—Confused Café Owner
Your confusion is understandable, as the answers to your questions depend on many variables, such as the employees’ duties. There are also important differences between federal and state laws. Employers must comply with both federal and state wage laws (as well as any local laws), and generally must satisfy whichever law is most favorable to employees.
Under the federal Fair Labor Standards Act, employers may pay tipped employees as little as $2.13 per hour as long as the combination of the tips they receive and the wages the employer pays are at least equal to the full federal minimum wage of $7.25 per hour, and the employees customarily and regularly receive more than $30 a month in tips. The difference between the reduced minimum wage for tipped employees and the full minimum wage is known as a “tip credit.”
Some states, including Alaska, California, Minnesota, Montana, Nevada, Oregon, and Washington, do not allow employers to take any tip credit at all. Many other states have minimum wage requirements that exceed the federal $2.13 per hour tip credit wage and/or the $7.25 per hour full minimum wage. As a result, it is extremely important that you consider applicable state and local law on wage rates and tip credit.
If you are taking a tip credit, the federal law and some state laws require you to provide notice to the tipped employees informing them of the requirements for a tip credit.
One of the questions that often arises is whether sandwich shops and other food establishments with no table service can take a tip credit under federal law. Under the federal DOL’s 2021 regulations, employers may take a tip credit only for tipped employees who are engaged in “tip-producing” work. “Tip-producing” work is work that provides service to customers for which tipped employees receive tips.
Employers may not take the tip credit for “directly supporting” work that exceeds 30 continuous minutes or exceeds 20% of an employee’s weekly hours as a tipped employee. “Directly supporting” work is work that is performed in preparation of or to otherwise assist tip-producing work. For work that is neither “tip-producing” nor “directly supporting,” tipped employees must be paid at least the full minimum wage.
To assist with these somewhat circular definitions, the DOL provides several illustrative examples of “tip-producing” work in a table service restaurant. For example, “[a] server's tip-producing work includes providing table service, such as taking orders, making recommendations, and serving food and drink.” DOL regulations and guidance also provide several illustrative examples of “directly supporting” work in a table service restaurant, such as preparing the dining room and bussing tables.
The regulations and DOL provide very little guidance for sandwich shops and other establishments without table service. Your counter people may take orders, and may make recommendations, but do not provide table service. Is what they do considered “tip-producing”? The scope of tip-producing work in a sandwich shop like yours is not entirely clear.
Because of the complicated overlap of federal and state law, and the lack of clear guidance on the applicability of the federal tip credit in restaurants without table service, you would be well-advised to discuss your particular work setting with experienced counsel before implementing a tip credit.
As to your questions about who gets the tips left through the online payment platform, you must again consider federal and state law. Under federal law, the first rule is that owners, managers, and supervisors generally may not keep any portion of the tips received.
To share tips among non-managerial employees, employers may set up a “tip pool” to distribute tips according to a formula, such as one based on hours worked. Where the employer takes a tip credit, only tipped employees are permitted to receive tips from the tip pool. Where no tip credit is taken, federal law allows tips to be shared with non-managerial employees, including back-of-house workers such as dishwashers and cooks. As noted above, owners, managers, and supervisors generally may not participate in either of these tip pools, even if they also serve customers.
Again, however, you must also consider any state or local laws on sharing of tips. Some states have more restrictions than federal law on who can be included in a tip pool.
Credit Card Fees
Although federal law permits employers to deduct from tips for fees charge by financial institutions for credit card processing, some states do not allow such deductions.
Given all these variations, Confused, we recommend you carefully review the laws in the states where you operate to assure you are in compliance with both state and federal tipping laws.