Employees in the service industry, such as bars and restaurants, receive tips from customers. Tips are optional payments by customers to employees as gratuity or gifts to appreciate the employee’s services. The law defines tipped employees as those who regularly earn more than $30 a month in tips.

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Tipping laws, regulated by the Fair Labor Standards Act, exist to protect tips as part of the employee income and ensure that employees receive a minimum wage. As a CEO of a business in the service industry, you need to understand tipping laws as they determine how you pay your employees. Below are some of the things you should know about tipping laws to avoid violating employee rights.

1. Tips are Employees’ Property

According to the Fair Labor Standards Act, tips are the employees’ property. It is, therefore, illegal to form any local arrangement with the tipped employees or require them to transfer the ownership of some of the tips to the employer or management.

The FLSA also prohibits employers from using employees’ tips for any other reason other than taking a credit against minimum wage responsibility. However, employers may retain the tips to further a valid tip pool. You can only count the tips your employees receive when determining whether they are tipped employees or not, as well as when applying for tip credits.

2. Tip Pooling and Tip Sharing

The only time your employees may not retain their entire tips is when you are furthering a valid tipping pool agreement. During tip pooling, you may collect part or all the tips before redistributing them among employees who regularly or customarily receive tips. However, you must first notify your employees about the arrangement and the amount of contribution. Also, you can only take tip credits from the amount each employee receives.

While most people use tip pooling and tip sharing interchangeably, they don’t mean the same thing. Tip sharing refers to a more informal and voluntary arrangement for sharing collected tips among employees and includes those who don’t receive tips.

Unlike tip pooling, the US Department of Labor doesn’t regulate tip sharing. According to the FLSA, employers who fully pay their tipped employees the minimum wage may manage a tip-pool and include employees who don’t receive tips. However, employers who take tip credits can only manage a tip pool of employees who regularly or customarily receive tips.

3. Service Charges

According to federal law, mandatory service charges on customer’s bills such as those charged for catered events and private parties do not count as tips. Employers may keep the service charge money as the law recognizes it as an agreement between the business and the customer. It is therefore not an acknowledgment of the employee’s good service.

The decision to share the service charge with your employees lies on you, and your employees have no entitlement over the money. If you decide to share the money with your employees, you may not count it as a tip. However, you can use the amount to satisfy the compulsory minimum wage or overtime payments, as per the FLSA.

4. Tip Credits

The FLSA allows employers to only take tip credits against the minimum wage obligation for tipped employees. The tip credit enables you to pay your tipped employees less than minimum wage as long as the tips they get, plus their hourly pay, amount to the federal minimum wage. As such, you may use the tip amount to offset the required cash wage. Since the minimum wage is $7.25 per hour, and the required cash wage is $2.13 an hour, tips can cover the difference.

Before you can take a tip credit, you must provide the following information to your employees.

• Pay tipped employees wages of at least $2.13(required cash wage)
• The employer may take a tip credit of not more than $5.12 an hour
• The employer must make up for the difference if the tips fall short of $5.12 an hour
• The tip credits should not exceed the amount of tips your employees receive
• Employees may keep all tips except when a valid tip pooling arrangement exists for tipped employees
• Inform the tipped employees about the tip provisions before tip credit can apply to the employees

Failure to provide the above information to employees means you must pay them the full minimum wage ($7.25 an hour) and allow them to keep all the tips they receive.

5. Credit Cards

When tips are charged on credit cards and the employer has to pay the credit card company a given percentage per sale, employers may pay workers the remainder of the tip after deducting the credit card charge. However, the deductions should not reduce the employee’s wages below the minimum wage, or you risk violating the law as per FLSA.

You should always pay the employee their tips not later than their normal payday. On the same note, do not hold employee tips beyond payday while waiting for reimbursement from the credit card company.

6. State Tipping Laws

State tipping laws may vary. As a CEO, you must understand your state’s tipping law to ensure your business stays compliant. For example, some states like New York have a higher required cash wage for tipped employees than the usual $ 2.13. Some states like California require employers to only take tips into account after paying employees the minimum wage.

Since tipping laws may be complex, it is advisable to work with a lawyer. Doing so also ensures that you meet your financial and legal obligations to your employees and avoid claims and litigation.