Is Your Gratuity Program Compliant?

Gratuity compliance — in other words, complying with regulations, laws, and ethical standards that relate to tipping — is a must, especially within the hospitality industry. Failure to do so can result in everything from legal penalties, lawsuits, and employee discontent to a damaged reputation and loss of business.

The Benefits of Automating Gratuity Distribution

Implementing the right gratuity distribution solution does more than help you stay compliant. Other benefits include:

  • Streamlined gratuity distribution and minimization of errors through digital tip tracking and distribution
  • Guaranteed accurate recording and allocation of tips thanks to real-time tracking of gratuity through a centralized hub
  • Boosted employee morale and satisfaction from the confidence that management is utilizing a seamless and reliable process

Some hotels opt to implement a pooling structure to ensure that all employees receive a fair share of tips, rather than just those who interact with guests the most. Implementing a tip pool can be challenging, especially when it comes to IRS compliance. Fortunately, some digital tipping systems also automate the tip distribution process, which can help in tip pooling IRS compliance.

Gratuity Compliance: What Does the Law Say?

The U.S. Department of Labor’s Fair Labor Standards Act (FLSA) is the federal law that governs tip pooling for employers. According to the FLSA, employers may implement a tip pooling system as long as certain requirements are met. We recommend that you familiarize yourself with the FLSA and your local pooling laws before implementing a tipping pool.

Here are some important points to keep in mind about tips and gratuity compliance in terms of federal compliance:

  • Employees who receive tips are classified as tipped employees if they make more than $30 in tips per month.
  • Employers can pay tipped employees less than the standard minimum wage, if the total amount of tips, combined with the hourly pay, reaches or exceeds the federal minimum wage of $7.25. If not, employers are required to make up the difference through a tip credit.
  • Employers, supervisors, and managers are not allowed to keep any portion of employee tips, no matter the situation.
  • Non-tipped employees, such as cooks and dishwashers, can participate in the tip pool if employers pay tipped employees the full minimum wage without applying a tip credit.
  • Gratuity for a mandatory tip pool must be distributed entirely within the same pay period in which they were collected.
  • Employers who do not take a tip credit, but still collect employees’ gratuity for a mandatory tip pool, must maintain payroll or other records that include information about each employee who receives tips and their amounts reported on a weekly or monthly basis.
  • Employers can use tip credits only if at least 80% of an employee’s work involves activities that generate tips and no more than 20% involves support work, like setting tables or cleaning the bar. This is referred to as the 80/20 rule.

FLSA Requirements

Automation can help you remain compliant and streamline audits within these three requirements from the FLSA.

Requirement #1: Employees must be informed about the tip pooling system and how it works. This includes the percentage of tips that will be allocated to the tip pool and which employees are eligible to participate.

How automation can help: One of the main challenges of implementing a tip pooling system is keeping track of the tips collected and distributed to employees and then reporting on these tips. This can be a time-consuming, error-prone process, especially when done manually through Excel sheets and cross-referencing reports. Through an automated tipping system, employers can streamline the process to ensure all employees receive a fair share of the tips. You can also offer your associates direct visibility to tip rules and allocation via an employee-facing portal.

Requirement #2: All employees who are part of the tip pool must be able to share in the tips equally. This means that the tips must be distributed based on a predetermined formula or percentage, rather than at the discretion of the employer or any employee.

How automation can help: An automated tip management system can help employers keep accurate records of all tips collected and distributed. The software can automatically calculate the amount of tips that should be distributed to each employee based on the agreed-upon percentage allocated to the tip pool or hours worked. This eliminates the need for error-prone manual calculations and provides clear documentation of all adjustments.

Requirement #3: Employers are required to keep accurate records of all tips collected and distributed and to report all tips as income on the employees’ W-2 forms. This includes both cash tips and digital tips charged to the guest’s credit card.

How automation can help: In addition to tracking tips, automating your tip management can also help generate reports that show how much each employee has received from the tip pool. These reports can be used to ensure that all employees receive a fair share of tips according to their agreed rules as is compliant with IRS regulations. They can also ensure that all tips are reported as income on employees’ W-2 forms through reports that show the amount of tips that have been distributed to each employee.

The Advantages of an Automated Pooling System

Automation can aid in tip pooling IRS compliance in all areas of the hotel industry. By automating the process of tracking tips, employers can ensure that all employees receive a fair share of tips and show with full accuracy where tips are being allocated. Additionally, automation can help ensure that all tips are reported as income on employees’ W-2 forms, reducing the risk of legal issues. By leveraging this technology, employers can create a fair and compliant system that rewards the hard work of their associates.

As you begin to budget for the coming year, now is a great time to assess your current challenges and market opportunities. Thinking of the future now will give progressive, forward-thinking finance teams the benefits of a first-mover advantage in the coming years.

So, how are you planning to tackle your challenges next year?

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