Does Your Staff Collect Tips?
New rules from the Pennsylvania Department of Labor regarding tipped employees go into effect on August 5. These rules are also implementing many of the Federal Department of Labor's 2021 updated tipped wages regulations already in effect. It’s important that employers who pay their workers via tips understand the changes that may affect them. As always, this is a general guide, so if you collect tips or have employees who do, speak with an attorney about your specific considerations for these new rules.
Who Qualifies as a Tipped Employee?
There are two changes to the rules surrounding what makes someone considered a “tipped employee” for purposes of employee protections, how wages are calculated, and the implementation of the act.
Under the new rule, in order to qualify as a “tipped employee,” an employee must make at least $135 in tips per month. This is a significant increase from the 1977 amount of $30/month (and the federal amount).
The new rule also incorporates the federal regulation known as the “80/20 rule." So long as an employee spends 80% or more of their overall shift time doing work that would typically produce tips, their full pay can be calculated as “tipped pay.” However, if any employee's work has the employee spending more than 20% of their time during the week doing non-tip producing work (such as rolling napkins, filling salt and pepper shakers, etc.), then the employee must be paid at least the standard minimum wage for any time over 20%. The federal Department of Labor’s rule explains in detail what actually constitutes “tip-producing work” and nuances in the law.
However, Pennsylvania did not adopt the whole federal rule, leaving out the part of the federal rule that requires someone who does more than 30 minutes in a row of non-tip-producing work not to be classified as a “tipped employee,” even if the remainder of their time, and more than 80% of it, was tip-producing. Pennsylvania said this would be too difficult to follow or enforce.
Who Can Contribute to a Tip Pool?
A tip pool is when a number of workers put all or a portion of the tips they earn in a given shift into the same collection pot and split them evenly (or by a set percentage) at the end of the shift. Pools can be a point of contention for those who find they consistently contribute more to the tip pool than others, but the intention is to fairly compensate all staff regardless of how the tips are generated – or who gets the luck of the draw with the highest tipping customers. The new Pennsylvania rules change who can pull from these pools. They incorporate by reference the federal regulations related to provisions of the federal Fair Labor Standards Act.
The first rule change surrounds tip credits. Pennsylvania employers can pay tipped employees a base rate of $2.83 per hour and have tips make up the remainder of the employee’s wages so they reach at least the standard minimum wage, currently $7.25 per hour. If a qualified tipped employee’s combined base wages and tips together do not equal at least $7.25 per hour for all hours worked, then the employer must make up any remaining amounts. Using tips to make up the difference between the tipped wage of $2.83/hr and the standard minimum wage is commonly known as a “tip credit.”
The implemented regulations explain that when an employer takes a tip credit, that is they use tip money to make up the necessary difference between $2.83/hr and $7.25/hr, then a tip pool must be limited to employees who “customarily and regularly receive tips.” When an employer does not take this tip credit, that is, the employer pays all of its staff at least the $7.25/hr wage, then a tip pool may include customarily tipped employees as well as employees who do not customarily and regularly receive tips.
In simpler terms: If an employer takes a tip credit (counts tips towards meeting their minimum wage requirement), only tipped employees can contribute to and pull from the pool; if an employer doesn’t take a tip credit, any non-supervisory employee (more on that later) can contribute to and pull from the pool (for example back of house employees).
Management in Tip Pools
The regulations also make it clear that employers, supervisors, and managers cannot receive tips from a tip pool. Additionally, even outside of a tip book the only tips supervisors and managers are allowed to receive are tips given to them for work they directly and solely contributed to. If a manager helped a server carry out a large order from the kitchen, that manager cannot receive a tip, or any portion of a tip, for that action because both the server and the manager contributed. Managers and supervisors can put their tips into pools, they just can’t pull from them.
The new provisions also require employers who do implement tip pools to maintain a record of all names and positions of everyone who participates in the tip pool as well as the amount distributed to each participant in the tip pool. This is accountability to make sure everyone is being paid fairly and equitably.
How Can Employers Apply Fees and Service Charges to Tipped Wage Calculations?
Under the new rules, credit card fees and service charges are prohibited from being deducted or calculated into tipped wages. The new rules prohibit employers from reducing a tipped employee’s earnings by any credit card processing fee. It also prohibits service charges from being calculated into a total tipped-pay amount, although it does grant employers discretion about how those charges are distributed. Another big change is that employers must now notify customers that service charges are not tips with billing statements accounting for separate lines distinguishing between tips and service charges.
Briefly, Overtime Rules.
The rule also implements changes for calculations of overtime pay to salaried employees by re-configuring how “weekly compensation” is calculated. Basically, an employee’s salary should now be calculated by adding weekly compensation and dividing by 40, then providing overtime pay of 1.5 times that regular rate in excess of any hours more than 40 worked in that week. We recommend speaking to a lawyer if you have salaried nonexempt employees who qualify for overtime to make sure you are paying them in compliance with the rule change.
This is a basic overview of some pretty big changes, especially for restaurants in PA. Check with your lawyer if you’re not sure how these changes could affect you and your business and how to implement these changes accordingly. You can read the full text of the rule, as well as some pretty comprehensive purpose and background information at 34 PA. Code 231, here:
And read our blog post about some other hiring considerations for new employees.
DISCLAIMER: This blog post is meant for informational purposes only and does not constitute specific legal advice or create an attorney-client relationship. Readers should discuss their specific situation with an attorney.