I need to get some clarification about the legalities of tip pooling in California and can’t get through to a human being on the phone.
Can anyone here help? Here’s my situation.
We are not a full service deli, more like 3/4 service. Customers place an order at the counter and then we bring the meal out to them. There are three of us out front and we all take and deliver orders based on who’s free. So none of us have tables that are specifically ours. We all help where needed. Most of the time, customers tip by credit card when they pay for the food or by placing cash in the tip jar. Once in a while, they’ll leave a tip on the table, but that’s rare. If that even matters.
Anyway, all the tips are receipted in daily and then once a month, I pay every employee a percentage of all those tips through payroll. From the little I can find online, it seems this is okay as long as the percentage is fair and reasonable. So I’m trying to find out if that really is legal, and if so, what is fair and reasonable?
We are actually open for 6 and 1/2 to 7 hours every day. But we only have hired help for 2 or 3 of those hours on most days. So all employees are sharing in tips received even when they are not working. Also, the percentage I pay them(10% each) is in addition to the hourly pay, which is minimum wage or better.
I had a new employee quit today over this. Her mother even called me a thief.
I would never want to cheat my employees and I certainly don’t want to get in trouble, so I’d sure like to get an answer about this issue.
You say you pay them a percentage. Does that mean that you take some of the tips for yourself or for the business before you distribute the rest to the employees?
If so, assuming that you are the owner or manager of the business, i think you might be in violation of California law:
The law also says:
Having given a GQ answer, i’ll also throw in the IMHO answer: if you’re the owner or manager, and you are skimming some of the tips before distributing them to your employees, then you are, in my opinion, cheating your employees.
I guess it’s possible that, if you have no outside employees for most of the day, then that might make some sort of difference. After all, if you are an owner/operator, with no employees, then surely you can keep the tips that people give you? So what is an owner/operator supposed to do with tips earned during the time when he or she is the only person working?
The guy I knew who ran a restaurant had a front-line worker manage the tip pool. Basically if the management collected and distributed the tips (a percent of what the server got for kitchen staff etc.) then it was considered pay and taxes, etc. would be charge and have to be withheld on the amount. In Canada the employer also pays taxes, unemployment insurance premiums, etc based on total earned income. If Joe Schmoe, server, does the distribution it`s an a greement between the workers and they can account for their own tips at income tax time.
I don’t have anything to contribute factually to what mhendo provided and I hope that voicing my opinion here in GQ isn’t too far out of line. The fact of the matter is, I think that the law is kind of irrelevant in this situation, even though it seems to support my position.
My assumption is that the majority of tip revenue is generated during the hours that you have employees on the clock. My opinion is that the proprietors of the business should not participate in the tip pool, at all. You should be running your business such that tips are not factored into your profitability and should be considered a benefit to your minimum wage or better employees. I think that tips should be pooled per pay period (not per month) and split on an hours-worked basis.
$400 in tips for a week with total employee time clocked at 40 hours = $10 per hour worked. Two employees who worked 15 hours each get $150 and the third employee who worked 10 hours gets $100. Pay rolled and taxed. The house needs to earn its revenue on profit margin, not tips, no matter how hard you work.
In other words, the employers avoid payroll taxes and the employees avoid income taxes. I don’t know if that’s actually legal in Canada (seems unlikely), but it’s not in the US. Servers under-report tips as a general practice here, but that doesn’t make it legal.
Do I have to provide a GA before being allowed an IMHO? Assuming not mine is that tips are for services and anybody who provides those services should be able share in them without being considered a cheater.
My personal rule for tip pooling is not to patronize any restaurant which pools tips.
I don’t mind a deal where the back-end staff get a cut, but I strongly object to any deal where the outstanding servers and the deadwood all get the same. I have never had good service from any place where they pool tips.
More precisely, I have never had good service from any place where I actually know that they pool tips - some places publicize the policy (as though it was something to be proud of), but others may not.
Also IMHO- I imagine that your servers hate this method whether it’s legal or not. One of the few good things about a server job is that you leave your shift with some cash in your pocket. Adding the tips to pay period means almost nothing since server pay is usually so low, and sharing tips with other shifts is even worse. You may as well just tell them your tips are mine and I’ll share with you if and when I feel like it. Is there a big problem with just splitting the cash evenly among the servers at the end of each shift?
If Sally makes a $10 tip (whether or she shares it with Joe), the employer pays no payroll taxes on it, is not required by law to withhold income tax, etc.
If the employer takes a share of the tip, and then gives it to the employees, it is “money from your employer”, or as Canada Revenue Agency calls it - employment income. The rules basically do not allow you to pay cash bonuses, free meals, endorse your parking, slip you $10, or any other trick whereby the employer gives a benefit to the employee and does nto count it as income.
Yes, Sally and Joe have to declare the tips on their income tax at the end of the year.
I think the biggest hassle was not whether it added a few dollars to the payroll taxes; it was the book-keeping hassle of accounting for all this. Like most small businesses here, they ue a payroll agency. Phone in the hours and rate, the payroll company generates direct deposits, does all the tax remittance and tax form. Now figure in that you have to, each pay period, make an adjustment on everyone’s pay stub to account for cash distributed, etc. they payorll company does not want the headache either. Too much data entry, too much error.
Odds they’d be called on it by the CRA? Pretty low. Cost if they ***are ***charged for not doing the remittance right? Very expensive.
md2000, I don’t know Canada’s rules, and the OP is not asking about Canada’s rules. What you describe is illegal in California because it’s illegal everywhere in the US. Employees are required to report tips to the employer if they receive more than $20 in a month, and employers who collect and distribute tips are required to report any amount. Either way, tips become part of payroll and payroll/income tax is withheld. There’s a form on the personal tax return for unreported tips, but this is basically there for people who screwed up and didn’t do it right to begin with.
Here, the only way to legally practice what you call “hassle avoidance” is to not accept tips.
For the OP: As others have mentioned, the law restricts the owner from keeping tips that are pooled, but nothing prevents the owner from keeping tips given directly to the owner. If you are the only one working, then keep those tips separate from the tips you pool.
In addition: Tips should be divided up based on hours worked. Someone should get 10% only if they worked 10 hours and all employees together worked 100 hours. My recommended practice for pooled tips is to calculate this every night. If there were $60 in tips and 30 man-hours worked that night, then everyone gets $2 in tips per hour worked. But if you’re just giving every employee a fixed 10% regardless of hours worked, that fits my definition of “unfair” because you’re penalizing the employees who work the most hours.
Thanks, dracoi, I’d never heard of that. Having to tally and report tips to the boss seems incredibly petty and annoying; your government at work. I suppose this means I should tip cash rather than on the credit card bill when in the USA?
Yes, the comment about 10% has me curious too. Every employee should take home approximately what they made in tips, it should average out over the workday - unless the amount is shared with kitchen workers who don’t get any tips - or the tips are particularly lean during the daytimes when there are no extra servers. If you are keeping the lion’s share for yourself, then no wonder the mother was upset.
(In the tip pool I described, each server paid 2% of the total bill - not tips - into the kitchen help pool… so theoretically, 1/5 of a 10% tip. It provided a decent amount for the kitchen help, while leaving the good servers to come out ahead of the poor ones… and all the servers kept the main part of their tips. I suspect most severely underreported actual tips at tax time. Welcome to Canada. )
First of all, the outrage here is misplaced. These employees are being paid at least minimum wage already. Most servers get less than $3 an hour and count on tips as part of their regular income.
But secondly, OP: you *need *to hire an accountant (or consultant). You cannot rely on the wisdom of the internet to run your business. If you’re messing this up from a legal standpoint (which it appears you very well may be), there’s no telling what else you might be doing wrong. State laws vary. Certain municipalities may have their own rules. It takes more than a love of food to run a restaurant, it takes savvy. If you don’t have that savvy, you *have *to pay for it. You may also be advised (by said accountant/consultant) to get a more sophisticated register and/or order system, so you can track which employees were on the clock during which orders.
Thirdly–whether or not it’s illegal, you should not apportion tips like this. It’s highly demotivational when a hard worker is not rewarded commensurate with their talent and effort. Your best employees will begin sliding toward mediocrity when greatness doesn’t garner a better reward. There are dozens of restaurants in every city in the country who manage to handle tips right, so the expertise is out there and shouldn’t be very expensive.
CA is one of several state that requires tips to be paid on top of minimum wage. The same is true here in WA… where we also have the highest minimum wage in the US (9.04). So the OP’s workers have a much better deal than they’d get in some states, but worse than they’d get in most other CA restaurants.
(Which just goes to prove your point about why local laws are so important and why experts needs to be consulted.)
I think this is a good philosophy, but it’s not really germane to the OP’s situation. We’re not really talking servers here in the traditional restaurant sense. These are deli counter workers that carry orders out to the patrons and that’s it. There is no real evaluation of the server and this is proven by the fact that the OP says most tips are given before service is even rendered. It sounds like the setup at Culvers or Panera (“what, you’re out of breadbowls!”) and similar type places. I doubt most people tip at all. So OP, what sort of $ amount are we talking here. Did this new worker quit because she’s not getting the $2/day she thinks she’s owed?
Well, hang on there, as I understand it the OP/owner is doing all the serving most of the day, and still doing his share in the busy period when he has staff in. I agree that it does sound as though he is holding on to an unfairly large cut (though it is hard to tell from the information given), but I don’t see that the help should be getting all the tip money when they are not even there when much of it is given.