Operations – Labor Laws

More regulations and tough times have increasingly caused more restaurant owners to cut costs wherever they can, which sometimes includes withholding money that is owed to their staff.  Whether unintentionally or on purpose, this cost-saving tactic should be avoided since its consequences could be disastrous.

All workers are protected by both federal and state regulations, including wages, overtime and tips.  But a new trend of wage lawsuits by large law firms has some restaurants double checking wage regulations.  Recent enforcement actions have created national attention and led to some serious consequences in restaurants all across the country.  The restaurants that have been investigated are penalized with sharp fines and forced to pay large settlements.  One New York City restaurant chain agreed to pay $5.1 million in a labor dispute involving minimum wage and the withholding of overtime pay for both current and former employees.  But independent restaurants are also vulnerable and must pay the higher of either state or federally mandated wages and overtime compensation.

The Fair Labor Standards Act (FLSA) is the federal act that protects workers minimum wage and overtime pay.  The law allows restaurants to pay tipped employees less than the minimum wages, although the sum of wages paid plus tips must be at least equal to standard minimum wage.  Here are some general FLSA guidelines to help make sure you are compliant.

Minimum Wage

As of July 24, 2009, the minimum wage is $7.24 an hour.  Restaurants that employ anyone under 20 must pay them a probationary “youth minimum wage” of $4.25 an hour for their first 90 calendar days of employment, although operators cannot fire employees earning higher wages and replace them with youth minimum wage employees.

Tipped, Below Minimum Wage Employees

“Tipped Staff” is defined as someone who is paid $30 or more in tips per week.  Restaurants must pay tipped staff at least $2.13 an hour, although that employee’s total wage plus tip must equal at least the federal minimum wage and the employee retains all tips (tips cannot be shared with managers).  If an employee’s tips combined with direct wages do not equal the federal minimum hourly wage, the employer must make up the difference.  Some states have different laws regarding the minimum wage for tipped employees.  Make sure to check your state’s regulations at http:///www.dol.gov/whd/state/tipped.htm.


The FLSA guidelines require that any employees that works more than 40 hours per week be paid one-and-a-half times the employee’s hourly pay rate for each additional hour worked past 40.  This overtime rate, also called “time-and-a-half”, applies to tipped staff as well as those receiving standard payroll wages.  For tipped employees, the time-and-a-half basis is on the federal minimum wage ($7.24), and not the tipped employee minimum wage of $2.13.

Employer Tax Obligations

Restaurants must used tipped employees’ total earnings – the sum of wages and tips – to calculate payroll contributions.  At the end of each year, restaurants submit IRS Form 8027, which summarizes the restaurant’s total sales and employees’ reported tips.  Total tip earnings must be at least 8 percent of the total sales.  Employees are obligated to report all tip income including those tips that are not included on their issued W-2.

Although these are some general guidelines, in order to ensure compliance please check both federal and state requirements when determining which labor laws apply in your area.  Growing federal, states and local mandates are creating increased scrutiny and higher fines, so it is beneficial for your business and your staff to comply with current wage laws.  Remember that any consequences from underpayment of employees could be devastating.

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