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 a recent 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.
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.
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 an advisory
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.
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