Legal Update: Tip Pooling and Mandatory Service ChargesAs illustrated by a recent U.S. Court of Appeals decision concerning a Starbucks tip-pooling policy, employer tip policies (including the extent of those employees who may participate in tip pools) is continuing as a highly litigated issue.
Although 13 States have laws or regulations regarding how tips may or may not be allocated, the Federal Wage & Hour Law provides only limited guidance. This probably accounts for the rash of lawsuits against hotels, restaurants, coffee houses, casinos and other hospitality industry employers. Many of those lawsuits center on employers who allow certain non-employees, those with supervisory authority or those who do not customarily receive tips to share in a tip pooling arrangement.
In a related development, on January 1st, the Federal IRS began enforcing a 2012 ruling that mandatory “service charges” imposed by hospitality industry employers must be reported as income for tax purposes, and any portion of such service charges distributed to employees must be treated as “wages” subject to payroll taxes and withholdings. Many employers with tipped employees, such as restaurants and hotels, impose service charges under certain circumstances (e.g., serving tables of six guests or more) rather than simply allowing customers to leave discretionary “tips” because employers have more flexibility to distribute service charges to a variety of employees – not just those who provide service directly to customers. However, employers using service charges may consider changing their policies and practices in light of the IRS’ new position.