You Can’t Have It Both Ways

sushiFrom Hawaii comes the story of the Tsukiji Fish Market and the tip pool that cost them over $57,000.

Reportedly, Paradise Inn Hawaii LLC, doing business as the Tsukiji Fish Market in Honolulu, elected to take the tip credit when paying their wait staff, but then forced their tipped employees to share those tips with other back of the house workers who are not normally tipped.

What is this “tip credit,” anyway?

Federal wage and hour law (and the laws in most states) allow employers to pay tipped workers an hourly rate lower than the normal minimum wage — as long as the total of the wage and the tips each worker receives brings his or her compensation above the normal minimum. The advantage to this for employers is that they usually end up paying much less out of their own pockets for wages; the difference is made up by their customers leaving tips.

For example, the current federal minimum wage is $7.25, with a tip credit of $5.12, resulting in a cash wage of $2.13 per hour. This means employers can choose to pay each employee who customarily receives tips $2.13 per hour. As long as the combination of this cash wage and the tips received by the worker exceeds $7.25 per hour, everything’s OK. If the combination is less than $7.25 per hour, the employer must make up the difference.

(Note that in some states, those amounts may be higher, and some states may not allow a tip credit at all. Check with your employment law attorney to verify the rules where you are doing business.)

So what went wrong here?

The first important thing to note is that employers are not required to take the tip credit. It is something that some employers decide to do to reduce their own expenses.

The thing is, when you elect to take the tip credit, you’re also bound by certain rules that don’t apply if you simply go ahead and pay the normal minimum as a cash wage — most notably, rules limiting the use of tip pools. If you take the tip credit, you cannot require workers to share their tips with other employees who are not customarily tipped (such as cooks and bussers — and especially not with management). It’s acceptable if members of the wait staff decide voluntarily to share some of their tips with the back of house people as a way of saying “thank you” for favors performed or just for doing a good job in general. But if management has chosen to take advantage of the tip credit, they cannot then turn around and force tipped employees to share their tips with others who do not normally receive tips.

That’s what got the Tsukiji Fish Market in trouble: reportedly, they elected to take the tip credit, then tried to force tipped employees to pool their tips to share with all the restaurant workers. In the end it cost them over $57,000: $48,029 in tips and $9,538 in back wages for 68 workers.

Here’s what it boils down to: if you have tipped workers and want to mandate they share their tips with the back of the house, you must pay the regular minimum wage. If you want to take the tip credit against their wages, you cannot force tipped workers to share their tips with anyone else who doesn’t normally receive tips. (And keep in mind, you can’t force them to share their tips with management, no matter what.)

Now, what do you think? Are the cost savings from the tip credit worth it? Or is it better to just pay the standard minimum and not be subject to extra rules?

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