A tipped worker earns upwards of $30 per month on tips and, with the federal and state employment legislation shielding them, things get more complex. To avoid legal breaches, every employer in Indiana having more than one employee must follow the Fair Labor Standards Act (FLSA) requirements on minimum wage. You cannot pay hourly employees a base wage that is lower than the federal minimum.
What amount should be considered as a tip?
It is not always simple to determine how much of a client’s payment is a tip. If the client pays in cash and tipping is optional, the sum left over and above the price of services or goods (plus tax) counts as a tip. However, the regulations may vary if the employer charges an obligatory service fee or if the client settles their bill with a credit card.
Mandatory Service Fees
With big dining tables, private events, or catering functions, most eateries add a “mandatory service charge” to the invoice. According to federal law or in most jurisdictions, you cannot deem such payments as tips. The employer will keep any amount marked as a “service fee” even when the client knows the money goes to the employee and does not leave any extra cash on the table. This agreement between the client and the business is often legally considered as a voluntary acknowledgment of customer satisfaction.
Most employers pay at least a proportion of the service fees they collect to their workers. However, it is entirely at the discretion of the employer, as workers do not have a legitimate claim to it.
Any percentage of an obligatory service charge paid to the workers is earnings, never tips, as stipulated by IRS standards. This signifies, along with other subjects, that the employer should withhold or pay Social Security and Medicare tax upon such amounts, may not seek a credit against its taxation (including tips), and should include them as a piece of the worker’s hourly pay when calculating overtime compensation.
Only mandatory service costs, however, are subject to federal laws. These two characteristics should be met for any sum to be considered a tip instead of a service fee:
- The fee payment must be voluntary.
- The sum cannot be determined by company policy or susceptible to discussion with the enterprise; instead, the client must have a complete influence on the amount and the person who collects it.
Credit Card Payments
State laws vary on whether workers are eligible for the entire amount of a credit card tip. If an employer must incur a processing cost with the credit card provider, most jurisdictions allow employers to deduct a proportionate amount from the gratuity to offset the worker’s “share” of the charge. However, Indiana’s law is not clear on this matter.
Tip Basics
The fundamental premise of tipping is that it belongs to the employee, not the employer, according to federal and state statutes. Unless one of the following restrictions holds, employers may not ask employees to turn in their tips:
- Under state legislation, the employer may claim a tip credit. For some jurisdictions, the employer can use all or a portion of a worker’s tips to meet the minimum wage requirements. The employers consider some tips as if they outrightly belong to their employees, even when they do not actually “accept” them.
- The worker is a member of a legitimate tip pool. According to federal law, employees who are part of a tip pool must deposit a portion of their tips into the pool that is split with other colleagues.
Tip Credits
Irrespective of whether they get tips, workers may claim a federal- or state-mandated minimum wage for each hour (now $7.25). Employers are required by federal law to compensate tipped workers less than the minimum wage, provided they receive sufficient tips to cover the gap, which is known as “tip credit.” Therefore, the wages (federal or state) less the tip credit is the lowest rate employers pay hourly to tipped staff.
The employer makes up the difference when a worker does not receive sufficient tips for a specified workweek to earn the statutory minimum wage for every labor hour. They can issue a tip credit under Indiana law and compensate tipped workers as little as $2.13 each hour. If this rate, including any tips the workers receive, does not equal the entire minimum hourly wage, the employer must add the remaining amount.
Working Two Jobs
Sometimes, individuals work two jobs or devote a portion of their shifts to performing non-tipped tasks. If a worker does similar non-tipped work at the identical time as, or a sensible period before or after, doing tipped tasks, the employer may offer a tip credit for that duration.
Tip Pooling
Employers across many jurisdictions, like Indiana, can demand tip pooling or “tipping out.” Workers who are part of the pool must contribute a percentage of their tips, which is subsequently shared amongst all employees.
However, staff should be informed about the tip pool beforehand and must also contribute nothing more towards the pool than what is conventional and fair. They should keep their entire minimum salary.
Only workers who frequently receive tips are members of a tip pool, according to federal legislation, provided the employer offers a tip credit. Workers are not obligated to share their tips with colleagues who rarely get them, except if the employer does not at all offer a tip credit and only pays the minimum wage.
Tips from the tip pool should only include workers who take part in the line of service offered in the pool. Neither employer nor their representatives are entitled to any share of a pool, and the pool is divided justifiably, according to Indiana legislation.
The Takeaway
When you run a business, payroll issues could be a headache, especially when you have to handle plenty of other matters that are crucial to the smooth running of your business. This is why it makes sense to outsource such help. At ASAP Payroll Service, we have the expertise and experience to handle your managerial duties and ensure that your business runs smoothly. This is why plenty of businesses within Indiana entrust us with their payroll management. Contact us today to learn more about our payroll solutions and let us start a long term partnership with you that ensures your business thrives.
