Attention restaurant owners! This may benefit your organization. For those restaurant owners that are charging a service charge (allowed in most states and sales tax may apply) your tipped staff may qualify for an exemption from overtime. Per the Federal Dept. of Labor (state labor laws may vary) the following requirements need to be met) under Section 7(i) of the Fair Labor Standards Act:
1. the employee must be employed by a retail or service establishment, and
2. the employee’s regular rate of pay must exceed one and one-half times the applicable minimum wage for every hour worked in a workweek in which overtime hours are worked, and
3. more than half the employee’s total earnings in a representative period must consist of commissions.
Unless all three conditions are met, the Section 7(i) exemption is not applicable, and overtime premium pay must be paid for all hours worked over 40 in a workweek at time and one-half the regular rate of pay.
There are a few more things to consider here also, and we highly recommend you discuss this matter with your labor attorney before just embarking on implementing this.
But getting back to restaurant owners… Restaurants, hotels and motels may levy mandatory service charges on customers which represent a percentage of amounts charged customers for services. If part or all of the service charges are paid to service employees, that payment may be considered commission and, if other conditions in section 7(i) are met, the service employees may be exempt from the payment of overtime premium pay.
Again… I cannot stress enough to talk with your labor attorney if this situation applies to you, but this does exist for a reason and there are situations where this can apply.
See https://www.dol.gov/whd/regs/compliance/whdfs20.pdf for more details.
By Matthew Shiebler CPA