Gratuities in the Restaurant Industry

A "service employee" is defined as any employee whose duties relate solely to the serving of food and/or beverages to patrons seated at tables or booths, and to the performance of duties incidental to such service, and who customarily receives gratuities.  This means that a tip credit (toward the minimum wage) can be taken only for waiters and waitresses, and only during the time for which they are actually serving patrons at tables or booths, or performing closely related duties, and when they are receiving gratuities.

"Service" (and closely related) duties:
In order for an employee to be eligible for a tip credit, he or she must be engaged in performing service duties. The following is a list of such duties:
 

A restaurant employer may take a tip credit of 31% of the minimum wage on those employees who are performing service duties as defined above if they are receiving gratuities. If an employee is at times performing service duties and receiving gratuities, and at other times is working in the kitchen (for instance), the employer can segregate the times on the time card and pay for each differently. The kitchen work must be paid for at the full minimum wage, but if the times are properly separated on the time card, a tip credit can be taken on the "service time" portion of work. To clarify, please review the following example:
 
 

Total hours of work for the above week equals 23. The employer must pay at least minimum wage for all hours (currently $8.25 per hour), however, a tip credit can be taken on "service" hours. Hostess work, cleaning, and kitchen work (among other things) are not subject to the tip credit. Payment for this week should be as follows:
 

Notice that the above time record is very specific as to times and duties. If the employer does not keep a segregated time record, no tip credit can be taken.

The service employee on which the employer wishes to take a tip credit must in fact be earning tips, and must signify so each week on a tip credit statement*.  In this signed statement, the employee acknowledges that he or she earned tips that week. Failure to obtain and maintain these tip credit statements will void the employer's right to take a tip credit.

The nature of gratuities:
Gratuities (more commonly known as "tips") are defined as a voluntary monetary contribution received by the employee directly from a guest, patron, or customer for service rendered. Notice that this definition says that in order for a payment from a customer to be considered as a tip, the employer cannot exert any control over it. This means that if a restaurant employer chooses to require customers to pay an added "service charge" directly to the restaurant (not the employee), it is not a tip, even if the employer chooses to pass it along intact to the employee. Under this scenario, the employer could not take any tip credit.

Some restaurants allow customers to pay by credit card. Many customers include a tip on the credit card slip. If such tips are forwarded in whole to the service person, they can still be considered as "tips" under the Restaurant Wage Order.

Banquet Service Employees:
Some restaurants may offer banquet facilities to the general public and staff such functions with service personnel. These service people must be paid at least minimum wage and time and one-half if they work over 40 hours in the week, even if they are paid a lump-sum for their banquet work. If the lump-sum payment averages more than minimum wage for the hours worked, no further payment is necessary. If it does not, the employer must make up the difference. It is therefore important for the employer to maintain true and accurate time records even if payment is not made on an hourly basis.

The employer may take a tip credit on banquet service people only if they receive their tips directly from the customers. Otherwise, the employee must receive the full minimum wage for every hour worked.

If the employer chooses to impose a "service charge", "gratuity charge", or any other such surcharge on a customer, that payment belongs to the employer, not the employee(s), regardless of its designation. However, if the employer in fact distributes that payment to the banquet employees, it becomes part of the hiring agreement and the employee(s) have earned a right to it on future banquets. Further, when an employer makes a payment of this nature (passing a "service charge" or "gratuity charge" on to an employee), the payment is considered as a wage under the wage payment laws. The employer can use this additional payment to cover minimum wage requirements, but is also responsible for paying time and one-half on the payment if the employee works over 40 hours in a week.

• Tip Credit Statement (PDF, 9KB)