One Way to Invite the DOL to your Business: Mess with Employees’ Tips

While on vacation in Hawaii this week, I was searching for a local topic to write about that would relate to others reading this blog. To that end I came across a small article named “Hawaii steak house restaurants to return $150k to employees.” The restaurants named in the article were investigated by the U.S. Department of Labor for violations related to tip income. According to the article, “Tipped employees’ cash wages were reduced below the minimum wage of $7.25 and wait staff was required to return a portion of their tips to restaurant management.” It’s hard to decipher exactly what the violation was in this instance but it did get me thinking about reporting tip income in general.

Tip income can be a sticky subject for any tip related industry, from a federal compliance perspective to an employee relations perspective. Added to that is the fact that each state has their own rules regarding how tip income is to be reported. Businesses must have procedures setup to track employees’ tips i.e. credit card tips or rely on employees reporting their own tips to their employer. There are also Tip Agreement programs (such as TRAC) administered by the IRS that companies and employees can enter into. Visit IRS.gov for more information on available programs. I work in the Gaming industry in Nevada where one of the more popular forms of tip income reporting is the Tip Rate Determination Agreement (TRDA) or “Tip Compliance.”

Tip Compliance is a program for the Gaming industry and is offered and managed by the IRS. Under the program, the IRS, along with cooperation from the business, analyzes reportable tips by position (gaming and non-gaming, as long as they’re part of the gaming property) and shift (day, swing, grave) to come up with an average amount of reportable tips per hour. For example, a swing shift waitress position at restaurant X may earn cash wages of $8.25 per hour, however the Tip Compliance analysis has determined that on average that position receives $10 in tips per hour on that shift. Therefore the reportable wages for that position would be $18.25 ($8.25 + $10) per hour. This is the rate at which Federal & FICA taxes would be deducted for the employee and employer tax portions along with the calculation of unemployment wages (keep in mind that unemployment wages may vary by state). In return for entering into this agreement with the IRS, employees will not be suspect to annual tip audits by the IRS. In addition, the employer will not receive an annual tip audit either.

You can quickly see that when a company makes a change in reportable tips, no matter what industry or which type of reporting program, you are directly affecting the amount of Federal, FICA & Unemployment taxes being transmitted to Federal and/or State authorities. This is why authorities do not take violations lightly and why a company can end up in hot water with the Department of Labor.

Do you have issues accurately reporting tips at your business? Do you think programs like Tip Compliance or TRAC  are successful for businesses?

Please leave me your comments.