In recent years, employers have faced increased litigation, government enforcement and regulatory activity related to tips, gratuities and service charges. This trend continued with the Washington State Department of Labor and Industries’ (L&I) issuance of a new administrative policy, effective March 6, 2019, on tips, gratuities and service charges.
Tips and gratuities are defined as amounts freely given by a customer to an employee. L&I’s administrative policy confirms that employers may establish mandatory tip pooling among employees who are non-exempt under the Washington Minimum Wage Act. This means that both back-of-the-house and front-of-the-house employees may participate in the tip pool so long as they are non-exempt.
Employers must exclude any employee who is exempt under the Minimum Wage Act, such as managers and supervisors, from these tip pools. This prohibition on management participation generally aligns with federal law. L&I’s administrative policy notes that managers and supervisors may accept tips only for services they directly provide.
L&I’s administrative policy explains that an employer may adopt a policy prohibiting an employee from accepting tips and gratuities. However, if a customer leaves a tip or gratuity despite the policy, the employer cannot confiscate the tip or gratuity. In these cases, the employer must allow the employee to retain the tip or gratuity. Employers should consider developing and maintaining written tip pooling policies and requiring participating employees to sign an acknowledgment of the policy. Employers who have such policies are encouraged to review their tip pooling practices to ensure their policies and practices are compliant.
L&I’s administrative policy also addresses service charges. Some employers have considered using service charges as an alternative to tips or gratuities. Service charges are defined as automatic charges added to a customer’s bill. Washington law requires employers to disclose the percentage of the service charge that is paid to the employee(s) serving the customer. This is known as the “employee portion” of the service charge. The employee portion of the service charge must be paid to employees who served the customer (e.g., servers, bussers, bartenders and bar backs), and cannot be distributed to managers or supervisors. L&I excludes back-of-the-house employees from its description of employees to whom the service charge may be distributed.
The required disclosure for service charges must appear on an itemized receipt and in any menu provided to the customer. L&I’s administrative policy provides examples of appropriate disclosure statements. For example, an appropriate disclosure statement on a restaurant menu may read: “A service charge of % / $ will be added to your bill. __% of this service charge is paid to the employee or employees who served you today.” Failure to disclose the percentage paid to the employee(s) servicing the customers causes the entire service charge to become due to those employee(s). Employers who use service charges should review their service charge practices and policies to ensure they are compliant.
L&I’s administrative policy also addresses issues related to payment of tips, gratuities and service charges. L&I notes that employers may allow employees to simply retain tips, gratuities or the employee portion of the service charge received in cash. If an employer collects tips, gratuities or service charges (e.g., tips paid by credit card), the employer must pay the employee portion no later than the pay period in which they were earned. Employers may not count tips, gratuities or service charges towards the employee’s hourly minimum wage. L&I also explains that employers may not deduct cash register shortages or other business expenses from tips, gratuities or service charges paid to employees.
The increased litigation, government enforcement and regulatory activity related to tips, gratuities and service charges creates an environment in which compliance is critically important for employers. L&I’s administrative policy provides useful guidance for employers, and employers should carefully review their current practices and policies in light of this guidance.
James Sikora is an attorney at Landerholm, P.S. He counsels clients in employment law and disputes in Washington, Oregon and Federal courts, and enjoys helping employers incorporate compliance into the operation of their business with the new application of existing employment laws and routinely advises them when employment laws change. Sikora can be contacted at firstname.lastname@example.org.