Hot Wage and Hour Issues

By Robert Wagner, CPA

Wage and hour issues are the Achilles Heel for many restaurants. Just when you thought you had the system for payroll taxes and employee compensation figured out, along comes the wage and hour police. When they visit, it is not to share pleasantries about the weather. In nearly every case, wage and hour officials visit in response to a complaint filed by a disgruntled current or former employee. There are numerous wage and hour violations that get restaurants in trouble. Here are a couple that have come up recently.

Overtime Pay Rate

Since the increase in the minimum wage to $5.15 per hour, many restaurants are calculating and paying server overtime at the wrong rate. This is an honest but potentially very costly mistake. Here’s how server overtime should be calculated:

The tip credit mentioned in the above calculation is NOT the FICA tip credit that is taken on your corporate income tax return. Rather it is the "credit" an employer receives toward the minimum wage rate from tips earned by servers. It is this credit that enables the employer to pay $2.13 per hour rather than the full amount of the minimum wage – $5.15 per hour. The credit amount is calculated as minimum wage of $5.15 less $2.13 = $3.02.

Servers are not "executive" employees under wage and hour law and therefore are NOT exempt from the laws governing overtime pay. No matter how you slice it, servers must be paid overtime at a minimum of $4.71 per hour. Paying servers less will subject the restaurant to substantial liability.

Don’t forget that overtime is based upon hours worked per week – not per pay period. If the server works more than 40 hours per week, then overtime pay for the overtime hours worked is required. There is no provision in the law for "comp. time" to offset overtime worked by minimum wage employees.

The Risk in Tip Pooling

Tip-outs or tip pooling is another potential trap. There is a fatal flaw in the tip pooling arrangement in many Georgia restaurants. To wit: Tip pooling is permitted ONLY between/among employees that normally receive tips. That includes servers, bussers, and bartenders. YOU CANNOT REQUIRE SERVERS TO SHARE THEIR TIPS WITH DISHWASHERS, COOKS AND EXPEDITERS! Unfortunately many restaurants don’t learn about their exposure until too late. Wage and hour officials do not instruct the restaurant to just straighten up and fly right. They assess the restaurant for lost tip income. One Atlanta restaurant was operating a tip-out arrangement that tipped dishwashers and others in the kitchen. An unhappy employee reported the situation and the wage and hour folks went to work. The restaurant had to make good on the shortfall in tips the employees had experienced. In the end, it cost the restaurant over $10,000 not counting legal fees.

A Little Cash Makes the Kitchen Happy

Another area where trouble is brewing in Georgia is the practice of paying some kitchen personnel in cash. This is a payroll tax issue rather than a wage and hour issue. All wages and bonuses should be reported as wages and appropriate taxes should be withheld and paid. Cash is paid in some instances because the employees prefer it. They may rather receive cash if they are illegal workers and have no intention of filing an income tax return. If a disgruntled employee complains to the authorities, the restaurant could be in serious and very expensive trouble. If found at fault, the restaurant could be liable for BOTH the employer and employees’ payroll taxes and withholding. In addition, penalties on underpayment could add up to 100% of the taxes due. Scariest of all, the restaurant owners are personally liable for any payroll taxes and penalties that the restaurant cannot pay.

IRS Updates TRAC Figures

In an exclusive interview, officials of the Atlanta District office of the Internal Revenue Service have released figures on their on-going tip compliance program. Currently, the IRS is promoting its Tip Rate Alternative Commitment (TRAC) program. This is the successor to the earlier Tip Rate Determination Agreement (TRDA). Both programs are designed to encourage servers to report 100% of their tip income and to enlist restaurants in the effort. Restaurants that signed up for TRDA generally can convert to TRAC if they wish and many have already done so.

Here are the TRAC and TRDA figures as of December 31, 1997:

The IRS reports that on average, restaurants that entered into one of these agreements have seen their tip reporting rate rise from 8.9% to 13.6%.

Robert Wagner is a principal in Robert Wagner & Company, LLC, CPAs. The firm provides tax and accounting services to restaurants, bars and hotels. He can be reached at 404-874-7000, fax 404-874-1132, email: rwagner@bellsouth.net.