The Law @ Work

Are You Paying Your Tipped Employees Properly? (It’s Harder than You Might Think.)

By Erica E. Flores

Bars and restaurants have been crushed by the COVID-19 pandemic.  And just as they were starting to get back on their feet, the fearsome second surge arrived, threatening to force yet another mandatory shutdown.  But COVID-19 is not the only threat to the long-term survival of our favorite local restaurants, pizza shops and dive bars.

Massachusetts wage and hour laws are incredibly protective of employees who rely on gratuities, including servers, bartenders and the drivers who deliver your take-out. And with automatic treble damages attached to most wage violations in Massachusetts, mistakes can be incredibly costly, if not outright ruinous. So, for those of you running a business that has tipped employees on staff, we thought a quick refresher course on these issues would come in handy as you prepare to weather what could be a very challenging winter.

A Glossary of Terms for Tipped Employees

To understand the Massachusetts Tips Act and related provisions of the Massachusetts wage and hour laws, you first need a quick vocabulary lesson:

  • A “tip” is a sum of money given by a customer as a gift or gratuity as an acknowledgment of the service performed by a “wait staff employee,” a “service employee” or a “service bartender,” including any amount designated as a tip by a customer who pays with a credit card.
  • A “service charge” is a tip that is mandated by an employer, rather than given voluntarily.
  • A “wait staff employee” is any employee who serves prepared food or beverages directly to patrons’ tables or clears patrons’ tables in a restaurant, banquet facility or another place where prepared food or beverages are served and who has absolutely no managerial responsibility whatsoever.  “Wait staff employees” include servers, bussers and counter staff, but typically exclude cooks, dishwashers and hosts unless those employees also spend a substantial portion of their time serving customers or clearing tables. (It is not yet settled, but one court has suggested that such services must be the employee’s “primary duty” for the employee to qualify as “wait staff.”)
  • A “service bartender” is any employee who prepares beverages for patrons to be served by another employee, either alcoholic or nonalcoholic.
  • A “service employee” is any employee who works in any industry other than food and beverage service, who also customarily receives tips for serving customers and likewise has absolutely no managerial responsibility.  Such employees include, for example, barbers and hairstylists, taxicab drivers, valets, concierges and casino games dealers.  They may also include drivers who deliver, assemble and/or install goods other than prepared food and beverages.
  • A “tipped employee” is any employee who regularly receives at least $20 in tips each month.
  • The “service rate” is the hourly rate that employers are allowed to pay to tipped employees (currently $4.95, increasing to $5.55 in 2021), in lieu of the minimum wage (currently $12.75, increasing to $13.50 in 2021), if certain conditions are met.

So how do all of these definitions fit together? Massachusetts law governing tipped employees comprises essentially two basic rules. These rules are interrelated, but for ease of reference, I’ll call them the “no sharing” rule and the “service rate” rule.

The “No Sharing” Rule

The “no sharing” rule means just what it says: employers are not allowed to share in their employees’ tips or to pass those tips on to managers or other non-tipped employees

In fact, employers cannot even accept a share of tips that is voluntarily offered and, if the tip is remitted initially to the employer, i.e. via a credit or debit card, the employer must pass it on to the employee by the end of the same day

Employers can require tipped employees to pool their tips to ensure a more even distribution, but only those tipped employees can participate in the tip pool – tip pools cannot, under any circumstances, be used to share tips with employees who do not provide tipped services or who have any amount of managerial responsibility. 

The same is true of service charges. If an employer imposes a service charge, it must pass that charge on to the tipped employees who serviced the customer(s), in proportion to the service each provided, and may not retain any portion for the business or for the benefit of any other employees. 

Employers are allowed to impose other charges – sometimes called a house fee, an administrative fee or a delivery fee – either instead of, or in addition to, a service charge, but they must advise their customers in writing that the fee does not represent a service charge and will not be shared with the employees.

The “Service Rate” Rule

This brings us to the “service rate” rule, which governs the requirements an employer must satisfy in order to pay a tipped employee the service rate instead of the full minimum wage. The most important thing to know about this rule is that it does not relieve employers of their obligation to ensure that their employees are earning at least minimum wage. So an employer that elects to pay a tipped employee the service rate is required to make sure that the employee makes an amount that is at least equal to the full minimum wage, between their tips and the service rate, during every shift.

To comply with this requirement, employers must require tipped employees to report all cash tips they received at the end of each shift, add that to any tips they received via credit or debit cards (whether directly or as part of a tip pool) and their hourly wages at the service rate, and make sure the combined total is at least equal to what the employee would have earned at minimum wage.  If it is not, the employer must pay the employee the amount of the shortfall.

At current rates, a tipped employee who works an 8-hour shift must make at least $62.40 in tips during every shift:

Full minimum wage equivalent: $12.75/hour x 8 hours = $102.00
Wages at service rate: $4.95/hour x 8 hours = $39.60
Difference: $102.00 – $39.60 = $62.40

So if a server works a slow shift and only makes $45.00 in tips, their employer is required to pay them an additional $17.40 for that day’s work.

But that is not all. Employers are flatly prohibited from using the service rate unless they first notify their employees in writing. The regulations do not specify the exact content or timing of the notice, but presumably, it must be provided at the outset of the employment relationship and must explain how the service rate works, i.e. that the employer will only pay the employee the service rate and that the balance of the employee’s income will be in the form of gratuities unless the employee does not make enough tips to earn at least minimum wage, in which case the employer will make up the difference.

Correct Any Violations as Soon as Possible

These rules have been in place for a long time, but we have seen a sharp rise in lawsuits claiming violations of these rules, often on behalf of a whole class of tipped employees. With a three-year statute of limitations, automatic treble damages and no requirement to prove that any violation was intentional, these lawsuits can be hugely lucrative for employees and their attorneys. So if you think your business may be violating the “no sharing” rule or the “service rate” rule, or both, make it a priority to correct your error, preferably with the assistance of legal counsel. Making changes to compensation always raises eyebrows, and proper messaging can help reduce your risk of a lawsuit.

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