Tip Pooling and Credits in the Hotel Industry
By David Hogan Executive Director of Major Accounts, Heartland Payment Systems | November 30, 2014
Tip and service charges for the hospitality industry are complicated and because of that, hotels, restaurants and even airlines are easy targets for lawsuits.
To avoid landing in court, hotels must stay on top of the latest rules and regulations. In January, the Internal Revenue Service (IRS) issued new guidelines for tips and service charges. They are:
- Employers must withhold payroll taxes from the tip amount reported.
- Employers must, on a weekly basis, ensure a tipped employee earns at least minimum wage.
- Some states forbid the use of tip credit, which allows an employer to claim an employee's tip toward their minimum wage obligation; others impose significant record keeping and notice requirements.
In addition to the IRS' new rules, the Fair Labor Standards Act (FLSA), which issues standards for the basic minimum wage and overtime pay, has a separate set of guidelines for service workers, which if not followed, makes the hotel industry vulnerable for lawsuits.
And some hotel chains have learned costly lessons from violating the rules.
A major hotel chain in Hawaii was accused of misleading customers into thinking that the required service fees they paid on their bills were going to service workers. Under a class action lawsuit, the hotel agreed to pay lost wages to its food and beverage service workers, in addition to the loss of tips and interest.
The Hawaii Supreme Court passed a provision under the state's wage law, stating that it's illegal for hotels and restaurants to charge a mandatory service charge or mandatory customer charge without giving the money to the service workers as tips. Under the law, tips must be given to the service workers, or it must be stated that the fees do not go to the service workers.
According to the Bureau of Labor Statistics, the average annual salary of hotel employees ranges from $18,000-$23,000. To maintain a comfortable standard of living, a majority of these employees depend on gratuities or tips from customers to supplement their earnings.
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