New IRS rule could cut into restaurant workers’ tips

By Eric Boehm | Watchdog.org

MINNEAPOLIS — Even as President Obama and progressive activists are trying to sell the nation on hiking the national minimum wage to help restaurant workers and other low-wage employees, the Internal Revenue Service is seemingly determined to make life harder for those same workers.

A change in tax policy implemented Jan. 1 will prevent restaurant workers from collecting automatic gratuities — the added 18 percent fee many restaurants charge to groups of eight or more — as part of their tips. Instead, that added fee will be included in their payroll, meaning workers have to wait up to two weeks to get that extra cash and must pay additional taxes on it.

It means less money in servers’ pockets and more for the federal government.

“We had a lot of nervous servers when they first heard about it,” said Pat Forciea, marketing director for Hell’s Kitchen, an independent restaurant in Minneapolis. “They would have had to go without that extra money in their pocket until it went through the payroll process and showed up in their checks two weeks later.”

Forciea said his restaurant does quite a bit of banquet business for nearby businesses, and used to tack-on an automatic gratuity for those big groups.

He admitted to being confused by the rule change when it was first announced in June 2012, but after consulting with an attorney he was told there was an easy way around it.

Now, Hell’s Kitchen is using a “suggested gratuity” of 18 percent on big groups, but the amount isn’t added directly to the check.

Under the new IRS rules, that’s enough for it to still be considered a tip. But it means the workers don’t have the assurance of a good tip when taking care of a big group.

The whole thing has created a bit of a headache for restaurant management too.

Since restaurant workers in many states are paid below minimum wage (with the assumption that tips will make up the difference between their wages and the mandatory minimum wage), this ruling changes those calculations.

For restaurant and hotel owners, it should raise a red flag, according to Travis Gemoets, an attorney who specializes in hospitality and entertainment law.

Under the old rules, employees are required to disclose their tips to their employer on a monthly basis, and the employer is responsible for deducting income and payroll taxes from that amount.

Now that some tips will be regarded as part of an employee’s pay, it eliminates the possibility of an employee shortchanging the government when he or she reports tips for the month.

“This ruling will not only effect tax withholding, but also require employers to make additional overtime payments to the employees, above and beyond the automatic tip charged to the customer,” Gemoets said.

Including gratuities in an employee’s paycheck means wages may be calculated incorrectly, leaving employers vulnerable to lawsuits from employees and audits from the U.S. Department of Labor, which is already targeting the restaurant industry for increased scrutiny, he said.

All this comes while progressive activists and Democratic politicians across the country are pushing for an increase to the minimum wage, and using low-paid restaurant workers as an example for why wages should be higher.

FINDING LOOPHOLES: Restaurants like Hell’s Kitchen in Minneapolis have found that making gratuities voluntary is the best way around the new rule, but that could mean less cash for workers who rely on tips.

Obama called for a higher minimum wage in his 2013 State of the Union Address and repeated the call several times during the last year, most recently in a speech in early December.

The federal minimum wage for tipped workers is $2.13 per hour, which was set in 1991, but many states have higher wage requirements. A bill in the U.S. Senate would raise the tipped minimum wage all the way to $7.70 per hour.

But the new IRS rules could hurt those same low-wage workers.

Rich Jeffers, spokesman for Orlando-based Darden Restaurants, a conglomerate that includes Red Lobster, Olive Garden and Capital Grille, said their chains are doing away with automatic gratuities for parties of eight or more to avoid that extra paperwork and the confusion that comes with it under the new IRS rule.

Darden began experimenting last summer with alternatives to the automatic gratuity policy.

Beginning next week, all guests at Darden-owned restaurants will see precalculated “recommended tips” of 15 percent, 18 percent and 20 percent on all checks. Since the guest is left with a choice of tip amounts, it’s not considered compulsory and therefore not subject to the new rules.

That means workers get to keep the full amount of their tips, like before.

“Those tips are important to our employees and we want to make sure they are able to have them,” Jeffers said. “Like any other new regulation, we took a look at it and decided this was the best way to proceed.”

In testing the new tip process at about 100 restaurants last year, Jeffers said the group found no significant change in the tip amount left by guests.

Boehm is a reporter for Watchdog.org and can be reached at EBoehm@Watchdog.org. Follow @WatchdogOrg and @EricBoehm87 on Twitter for more.

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