Our September 24, 2013 blog posting discussed the automatic tip charges that restaurants had to abide by effective January 1, 2014. Currently in the news are proposals to increase the minimum federal wage which would affect many in the hospitality industry. According to Yahoo Finance, a local Philadelphia restaurant chain, Chickie’s and Pete’s (C&P), ignored labor laws and will pay $8.5 million to its employees for failing to pay them the minimum wage as well as improperly keeping part of their employees’ tips. The U.S. Department of Labor (DOL) reported this as the largest wage-and-tip violation in its history. The restaurant chain separately announced that it would spend almost $1.7 million to settle private lawsuits with some of its employees. The DOL probe apparently took about a year which undoubtedly cost the company much in professional fees and lost time for the employees handling the audit.
Unfortunately, far too many taxpayers often “adopt” policies or procedures based on what their friends, neighbors, and business associates tell them are proper. In cases such as C&P, it is important to understand what the employer did so that such practices are not repeated by others. So for all those employers who were questioned by their employees about their pay practices and responded that they are doing the same as C&P’s and thus must be in compliance, you are going to be in for a big surprise. This is why it is important for business owners who only consult with their tax professional for tax preparationservices to meet periodically to discuss tax planning and tax compliance.
What did C&P do wrong? The better question may be what did C&P do right? Certain employees were paid a flat shift rate of $15 rather than the $2.13 hourly rate. Assuming that a normal shift is 8 hours, the employees were not paid the minimum wage. Tipped employees were also required to pay a portion of their tips into a pooled fund shared with the bartenders (legal) and C&P (not legal). Employees were required to pay for their own uniforms, were not paid overtime, and were not compensated when attending staff meetings and training sessions.
C&P said that many restaurants have trouble navigating the “complex regulations” on tip pools and tip credits. While the rules are complex, why would any restaurant attempt to navigate complex regulations itself when it can consult with its advisors? The DOL is also available to advise employers how to comply with its regulations.
While the DOL did not state how it became aware of the situation, our experience is that in most cases an employee complains to the DOL and if the DOL agrees with the employee, an investigation is launched.
If you are an employer in the hospitality industry and wish to learn more about the computation of the minimum wage, determining what is a pay period, how to compute overtime especially when more than 40 hours are worked in a pay period, when tip income can be shared, and how your employees are to report tip income, we invite you to call 610-594-2601 today to make an appointment at our Exton PA CPA officeto discuss your situation.
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