Minimum Wage and Tip-Pooling

Wages are a constant pressure point for businesses, especially restaurants. Restaurant owners and managers face relentless pressure to minimize costs — particularly labor costs, which tend to overwhelm their balance sheets. Restaurant employers are understandably worried about the rapidly increasing minimum wage requirements. Just one year ago, most Arizona employers were required to pay a minimum wage of $10.50 per hour. For 2019 it is $11 per hour, and by 2025 it could be $15 per hour. In July, the United States House of Representatives passed the Raise the Wage Act, which could raise the minimum wage to $15 per hour by 2025 if the bill passes the United States Senate and is signed by the President. This rate is more than double the current federal minimum wage requirement of $7.25 per hour.

This rapidly increasing cost, which seems insignificant when considered on an hour-by-hour basis, computes to substantial added costs for restaurants when the total hours worked are multiplied by the total number of employees over an entire year. An added dollar per hour can strip even the most efficient restaurants of most, if not all, of their annual profits.

One measure built into the law to help employers with these costs is the tip credit, but restaurants must be thoughtful in its usage. Arizona employers may reduce the minimum wage paid to tipped hourly workers by up to $3 per hour, meaning a minimum wage of $8 per hour for 2019. The hourly rate will be higher in those cities and counties that impose a higher minimum wage, like Flagstaff. Only employees who regularly and customarily receive tips qualify for the credit, and employers must ensure that they are earning at least $3 per hour in tips, or the employers must compensate for the difference. This happens frequently, even for highly tipped workers. Restaurants must account for times when workers are in training or are working during downshifts, and employers that are applying tip credits must proactively monitor their employee tip earnings to comply with applicable law. Tips should be reported by the employer to the appropriate federal and state taxing authorities. Employers reporting less than $3 per hour in tips to the IRS will be hardpressed to justify a full $3 per hour tip credit.

Tip pooling permits employers to spread the tip credit amongst a greater number of employees by partially distributing tips earned by the wait staff to others, such as bussers and bartenders; however, this is very limited under Arizona law. While employers may understandably wish to share tips, requiring the sharing of tips with those who do not customarily and regularly receive tips may strip employers of the right to rely on the tip credit. Employers and managers may never take tips given to employees for themselves.

Like all employers, restaurants must carefully track employee hours and ensure that all non-exempt employees are paid for every hour worked. They must be paid at least the minimum wage, and overtime at the rate of one-andone-half their base rate for every hour worked over 40 hours in an established workweek. While employers have a great deal of flexibility in selecting preferred tools and systems for tracking employee hours, systems that contemporaneously and accurately track log-in and log-out times, and that permit employees to review and approve the reporting of their hours, are generally the most reliable.

Break periods must also be properly tracked. Employers should not assume and enter break periods in the system automatically. Employees who are required to work during their break periods must be paid for their time. Short break periods of 20 minutes or less must also be compensated.

Regardless of these well-established requirements, restaurant owners and managers still face the regular dilemma of properly compensating employees who do not properly report their full work hours, or who may volunteer to work off the clock. Off-the-clock work must be prohibited by employers. Unless an employee is truly performing a volunteer public service for a nonprofit endeavor, he or she is entitled to be compensated for his or her services. While the increasing pressure, particularly with well-intentioned managers and shift leaders to meet labor cost goals, creates a perverse incentive to overlook off-clock work, employers must be diligent in properly training all employees to report their work hours.

Employers should always be thoughtful in managing employee wages, including tips and other key pay nuances. Seeking advice from an experienced employment attorney can help ensure compliance with all wage and hour laws, and lower the risking of heavy fines and potential lawsuits.

Chris M. Mason is a partner with Jennings, Strouss & Salmon, P.L.C. He counsels employers on all aspects of labor and employment law, including collective bargaining and union organizing, restrictive covenants, employment discrimination, sexual harassment, whistleblowing, retaliation, wrongful termination, personnel policies, reductions in force, trade secrets, restrictive covenants, duty of loyalty, and drug and alcohol testing.