Tip Reporting Alternative Commitment (TRAC)

Tip Reporting Alternative Commitment (TRAC) https://wahospitality.org/wp-content/uploads/2016/05/pen-and-calc.jpg

Disclaimer – You are reading archive content on tip pooling. For the most current information, visit: https://wahospitality.org/tip-pooling/

Requirements for Tip Reporting Alternative Commitment (TRAC)

1. Educate employees about tip reporting.

Estimated time commitment: Approximately one-half hour minimum, quarterly.

What does “educating” mean? Well, it doesn’t mean having weekly seminars on the history of tips (unless you want to do this). You simply must emphasize four things to your employees:

  • Employees are obligated to report 100 percent of their tips.
  • Employees must keep records to substantiate their tipped earnings.
  • Fully reporting tips can benefit the employee (Social Security, loan applications).
  • The distinctions in reporting charge tips and cash tips.

How must you emphasize these things? That’s your call. The IRS has been good about letting restaurants pick their own venue for employee education. Some members have simply stamped a stern message on the tipped employees’ paycheck envelope saying: “THE IRS REQUIRES YOU TO REPORT ALL OF YOUR TIPS.” Others have shown the National Restaurant Association’s video regarding tips. Some have even had specific quarterly meetings reminding them of their reporting obligation. Whether elaborate or simple, the IRS just wants you to stress the four points listed above.

The Washington Hospitality Association recommends that if you do sign TRAC, you may want to see if the IRS is available to do the first educational meeting. This will set the appropriate tone of the seriousness of tip reporting.

2. Set up tip reporting procedures

Estimated time: With a POS system that has each report category, one hour minimum, quarterly; Without a POS system, four hours minimum, quarterly.

Like it or not, signing the TRAC agreement is going to mean more paperwork. When asking yourself the question, “sign, or don’t sign?” you should follow with the question: “Is doing the additional paperwork worth the savings of not paying past-due FICA on unreported tips?” Here are the specific things that you must do to comply.

  • Employer provides reports to directly tipped employees, at least once a month, showing:
    • Gross sales that are subject to tips.
    • Charge receipts with charged tips.
    • Total charged tips reported. ƒ
    • Total reported tips.
  • Employees complete the above report by filling in their cash tips received and tipouts. You need to compile this information for your 8027 form at the end of the year, anyway. Keep these reports for at least four years.
  • Establish a procedure for indirectly tipped employees to report their tips.

3. Comply with all tax obligations

Estimated time: Additional time to comply is unlikely, since there are no new tax obligations.

Hopefully you are already in compliance on your tax responsibilities, and this obligation will not mean any additional headache for you. But just in case, the federal tax forms you should be sure to complete are:

  • Form 941, Employer’s Quarterly Federal Tax Return
  • Form W-2, Wage and Tax Statement
  • Form 8027, Employer’s Annual Information Return of Tip Income and Allocated Tips.
    Restaurants enrolled in TRAC must mail a copy of their 8027 form to their local IRS district.

EmTRAC Agreements

The IRS developed the EmTRAC Agreement program in response to employers in the food and beverage industry who expressed an interest in designing their own TRAC programs.

EmTRAC Agreements are available to employers in the food and beverage industry whose employees receive both cash and charged tips. The EmTRAC program retains many of the provisions in the TRAC agreement including:

  • The employer must establish an educational program that trains employees that the law requires them to report all their cash and charged tips to their employer.
    • Education must be furnished for newly hired employees and quarterly for existing employees.
  • The employer must establish tip reporting procedures under which a written or electronic statement is prepared and processed on a regular basis (no less than monthly), reflecting all tips for services attributable to each employee.

The EmTRAC program provides an employer with considerable latitude in designing its educational program and tip reporting procedures, which the employer may combine.

For additional information about EmTRAC Program Requirements and EmTRAC Approval Requests, see Notice 2001-1

Recent Developments in Tip Pooling Law

Tip pooling is a common practice in the restaurant industry. There are two basic types of tip pooling arrangements: (1) employer-mandated tip pools and (2) voluntary tip pools. Generally, tip pooling is not prohibited by federal law, but employers should be aware of recent developments affecting employer-mandated tip pools.

  1. The Woody Woo Decision

In 2010, the Ninth Circuit Court of Appeals, which has jurisdiction over nine Western states including Washington and Oregon, issued a ruling on mandatory tip pooling in Cumbie v. Woody Woo, Inc.

  • Facts

Woody Woo started out as a lawsuit in Oregon federal district court. The plaintiff worked as a waitress at the Vita Café in Portland, which was owned by the defendant, Woody Woo, Inc. The defendant required servers to contribute their tips to a tip pool and then distributed those funds to servers and other non-managerial employees in various amounts.  The largest portion of the tip pool (55%-70%) went to “back-of-the-house” employees such as dishwashers, cooks, and chefs.

Dissatisfied with this arrangement, the plaintiff sued her employer in federal district court. She alleged, among other things, that mandatory tip pools violate the Fair Labor Standards Act (“FLSA”), the federal statute that governs tip pools.  Specifically, the plaintiff claimed that the FLSA prohibits employer-mandated tip pools that include employees who do not “customarily and regularly receive tips” from restaurant patrons (i.e, back-of-the house employees).

  • Outcome

The district court dismissed the lawsuit, and the plaintiff appealed to the Ninth Circuit Court of Appeals. The Ninth Circuit upheld the dismissal and ruled that the FLSA does not prohibit employers from implementing mandatory tip pools that include back-of-the-house employees so long as the employer (1) pays the full minimum wage in cash and (2) takes no tip credit.

  1. The 2011 U.S. Department of Labor (“DOL”) Rule

The DOL is in charge of enforcing the FLSA and promulgating regulations that further the purposes of the statute. In 2011, the DOL issued a rule amending its tip credit regulations in response to the Woody Woo decision. Under the new rule, mandatory tip pools that include non-customarily tipped employees are prohibited regardless of whether employers pay the full minimum wage and take no tip credit. Specifically the DOL stated:

“Tips are the property of the employee whether or not the employer has taken a tip credit under section 3(m) of the FLSA. The employer is prohibited from using an employee’s tips, whether or not it has taken a tip credit, for any reason other than that which is statutorily permitted in section 3(m): As a credit against its minimum wage obligations to the employee, or in furtherance of a valid tip pool.”

Rev. 1/29/14

The DOL announced that it would enforce this rule in Ninth Circuit jurisdictions in spite of the rule’s conflict with Woody Woo.

  1. The Oregon Restaurant and Lodging Ass’n v. Solis et al. Lawsuit

In 2012, the Washington Hospitality Association, along with several other restaurant associations, filed a lawsuit against DOL in Oregon federal district court. In Oregon Restaurant and Lodging Ass’n v. Solis et al., the plaintiffs sought to invalidate the rule on several grounds: (1) DOL exceeded its authority in issuing the rule, (2) the rule is inconsistent with the text of the FLSA, and (3) the rule is inconsistent with Woody Woo. Before filing this lawsuit, the restaurant associations had asked DOL to reconsider its decision to enforce the rule against Ninth Circuit employers who comply with Woody Woo (i.e., employers who pay full minimum wage and take no tip credit). DOL rejected this request.

On June 7, 2013, the federal district court issued a ruling in favor of the Oregon Restaurant Association and the other restaurant associations that filed the lawsuit. The court found that section 3(m) of the FLSA, “imposes conditions on employers that take a tip credit but does not impose a freestanding requirement pertaining to all tipped employees.” The court held the 2011 DOL rule is inconsistent with the text of the FLSA and the Woody Woo decision.

Your Options

Even though the Oregon Restaurant and Lodging Ass’n v. Solis et al. ruling was a big victory for the restaurant industry, the DOL may still choose to bring enforcement action against an employer who implements a mandatory tip pool. Such enforcement action is unlikely, but you should still be aware of the risks. In light of these developments, you have three options going forward:

  • You may implement a mandatory tip pool that includes non-customarily tipped employees. However, such action will expose you to the risk of a lawsuit based on FLSA violations and noncompliance with the 2011 DOL rule. Plaintiffs’ attorneys across the country have been targeting the restaurant industry in wage and hour class action lawsuits, and some of these lawsuits have attacked tip pooling policies. Wage and hour claims are typically not covered by insurance, and the cost of defending against these lawsuits is potentially very high.
  • You may follow DOL regulations and implement a mandatory tip pool that includes only customarily tipped employees. However, you should ensure that the tipped employees do not spend time performing non-tipped work. Otherwise, your restaurant may face the risk of a lawsuit by plaintiffs alleging that such employees fall outside the FLSA’s definition of customarily tipped employees and are therefore prohibited from participating in mandatory tip pools.
  • You may allow your employees to participate in a voluntary tip pool. However, you should ensure that participation in your tip pool is completely voluntary. For example, you should not suggest that employees participate in the tip pool. Also, you should not discipline employees for declining to participate.

If you implement a tip pool, you should put the tip pool policy in writing and require each employee involved in the tip pool to sign the policy. The policy should be made available in other languages to ensure that nonnative English-speaking employees are properly informed of the policy.

Rev. 1/29/14

The Washington Hospitality Association cannot give you legal advice regarding recent developments that could affect your ability to put into effect tip pooling arrangements. The following discussion of the recent U.S. Court of Appeals decision in Cumbie v. Woody Woo, Inc., No. 08-35718 (9th Cir., Feb. 23, 2010) and the Department of Labor’s April 5, 2011 final rule (the “Final Rule”) published, in part, in response to that decision, is provided for you to share and discuss with your own legal counsel. We recommend immediate attempts to comply in good faith with the requirements of the Final Rule, until the effect the Final Rule’s conflict with the Ninth Circuit decision has been clarified by the Courts or the U.S. Department of Labor (the “DOL”). If you have any questions regarding compliance with the Final Rule, we suggest that you contact us at ((800) 225-7166) as we are working with legal counsel to monitor the DOL’s enforcement of the Final Rule’s tip pooling requirements in the state of Washington.

Summary

  1. Ninth Circuit Decision. The Ninth Circuit held that Federal law (Fair Labor Standards Act, 29 USC § 201, et seq.) does not restrict a restaurant employer from imposing a tip pool on directly tipped employees (servers) that includes tip sharing with back-of-the house employees (g.,  dishwashers and cooks) or requiring the directly tipped employees to share a substantial portion of their tips if the employer pays such employees at least the applicable minimum wage and takes no tip credit.
  2. April 5, 2011 DOL Final Rule. Generally, the Final Rule amended the DOL’s regulations issued under the federal Fair Labor Standards Act (“FLSA”) so as to clarify that an employer is restricted from sharing its front of house employees’ tips with its back-of house employees through a tip pooling arrangement, even if the employer pays such employees the applicable minimum wage and takes no tip credit. In essence, the new regulations completely contradict the Ninth Circuit Decision.

Background of Ninth Circuit Decision

Plaintiff worked as a waitress at the Vita Café in Portland, Oregon, which is owned by Defendant, Woody Woo, Inc..  She, along with all other servers, was paid a cash wage no less than the state minimum wage, which exceeded the federal minimum wage under the FLSA.  Defendant required servers to contribute their tips to a “tip pool,” which were distributed to servers and other restaurant non-managerial employees in various amounts.  The largest portion of the tip pool (55%-70%) went to so-called “back-of-the-house” employees, i.e. kitchen staff (e.g. dishwashers and cooks,); with the servers receiving 30-45% of their tips in proportion to the hours they worked.

Plaintiff filed a class action suit against Defendant in the federal district court, alleging, among other things, that Defendant’s tip-pooling arrangement violated the FLSA.  The district court dismissed the complaint for failure to state a claim, and Plaintiff appealed to the U.S. Court of Appeals for the Ninth Circuit.

Discussion

The law in regard to tips, tip credit, tip pooling, etc. is both complicated and dependent on the applicability of federal and/or state laws.  The focus of this decision was on the employer’s ability under federal law to impose a tip pool that otherwise contravened DOL mandatory tip pool restrictions.  Since Oregon state law prohibited tip credit and mandated a higher minimum wage than the federal minimum wage, Defendant took no tip credit and paid servers the entire minimum wage in cash.

Plaintiff’s argument on appeal was that both the statute (FLSA) and DOL regulations, while permitting tip pools, only allowed them if persons included in the tip pool “customarily and regularly” received tips, and that servers were not required to contribute a greater percentage of their tips than was “customary and reasonable” (DOL restrictions limit this to 15%).  Since “back-of-the-house” employees (dishwashers and cooks) do not “customarily and regularly” receive tips, and Plaintiff was required to contribute (without return) far in excess of 15%, Plaintiff and DOL argued that the tip pool was invalid.

The Court acknowledged the fact that Defendant’s pool included non-customarily and regularly tipped employees and that Plaintiff did not retain all of her tips.  However, the Court ruled that such restrictions did not apply here.  In a case of first impression at the court of appeals level, the Ninth Circuit concluded that nothing in the text of the statute (FLSA) restricts employee tip pooling arrangements when the employer does not take a tip credit and pays at least the federal minimum wage, even if employees who do not “customarily and regularly” receive tips are included. DOL’s argument that the 1974 legislative history to the FLSA supported its interpretation of the statute that tip pool restrictions applied to any situation regardless if a tip credit is taken, was rejected by the Court as inapplicable when, as here, the statutory text is clear. The court also rejected the argument that DOL’s long history of interpreting the statute to disallow employers to require servers to contribute a greater percentage of tips than is “customary and reasonable” (defined by DOL to be no greater than 15%), “contravenes court decisions and the unequivocal statutory language,” citing the sixth U.S. Court of Appeals decision in Kilgore v. Outback Steakhouse, 160 F. 3d 294 (6th Cir. 1998).

Impact and Considerations

  • According to the Ninth Circuit decision, an employer in the Ninth Circuit (Washington, Oregon, California, Arizona, Nevada, Idaho, Montana, Alaska, Hawaii) may require tip pooling and disregard DOL’s requirements only where no tip credit is taken and the employer pays tip employees at least the federal minimum wage or any higher applicable state minimum wage.
  • According the Ninth Circuit decision, employees who are not “customarily and regularly tipped employees,” such as cooks and dishwashers, can be included in a tip pooling arrangement, so long as the employer does not claim a tip credit and pays the minimum wage.
  • This ruling does not prevent a challenge to tip pooling arrangements under state law. In states that have specific tip pooling laws and regulations, g. California, employers must comply with the state law if it is more restrictive (benefits the employee) than federal law.
  • The Ninth Circuit’s decision did not discuss whether owners, managers or supervisory employees may participate in an employee tip pool where no tip credit is taken and all employee are paid at least the applicable minimum wage, and this remains an open question.tax

    Department of Labor Final Rule

    • The U.S. Department of Labor (“DOL”) issued the Final Rule on April 5, 2011. This new rule clarifies the DOL’s position that tips are owned by the employee that receives them, except if such tips are contributed to a valid tip pool. Contrary to the Ninth Circuit’s decision, the Final Rule states that, in order to be valid, a tip pool must conform to regulations issued under the FLSA even if the employer is not taking a tip credit. Thus, under the Final Rule, a tipping pool is not valid if an employer gives tips paid to front-of-the-house servers to back-of-the-house employees through such tipping pool. Obviously, the Final Rule puts into question the Ninth Circuit’s Woody Woo decision. However, the DOL’s enforcement policy with regard to tip pooling in Ninth Circuit states is unclear at this time.
    • Further, the DOL previously stated that it would not question contributions to a tip pool that are not in excess of 15% on employees’ total tips. In the Final Rule, the DOL states that there is no maximum tip pool contribution amount, but that it does require employers to notify their employees of any required tip pool contribution amounts. The DOL’s enforcement policy with regard to the percentage of an employee’s tips that may be contributed to a tip pool is unclear at this time.

    Recommendation

    ƒ The Final Rule directly contradicts the Ninth Circuit’s ruling in the Woody Woo case. However, at this time the DOL’s enforcement strategy in Ninth Circuit states (Washington, Oregon, Idaho, California, Alaska, Montana, Nevada, Hawaii, and Arizona) is unclear. At this time, it appears as if the DOL will not enforce the Final Rule with regard to tip pooling in Washington. However, the DOL could begin to enforce the Final Rule’s tip pooling requirements immediately, without notice to Washington employers. Therefore, we highly recommend that you contact your legal counsel or the Washington Hospitality Association at ((800) 225-7166) before creating a tip pool, especially if that pool that would require servers or others who are customarily and regularly tipped employees to contribute any portion of their tips to employees who are not customarily and regularly tipped employees.

     

    Rev. 12/08/11

 


This article is an excerpt from the Handbook for Excellent Restaurant Operations (HERO), published by the Washington Hospitality Association.  Want a hard copy of the whole manual?  It’s one of the many benefits of becoming a member!  Find out more about joining the Washington Hospitality Association here.

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