State of Washington's New Guidance on Tips, Gratuities, and Service Charges

The Washington State Department of Labor and Industries (L&I) has issued a new administrative policy, effective March 6, 2019, setting forth its enforcement guidance on tips and service charges under the state Minimum Wage Act. The new administrative policy generally confirms existing law and prior guidance, and clarifies L&I's position on tip pools, deductions from tips, and service charge disclosure requirements. Employers should review their current tip pool and service charge policies in light of L&I's new guidance.

Tips Must Be Paid to Employees, But Don't Count Toward Minimum Wage

Unlike the FLSA and some states, employers in Washington cannot take a "tip credit," meaning employers cannot count tips toward the state minimum wage rate ($12.00/hour in 2019).

In 2016, Washington amended the state Minimum Wage Act to require an employer to pay all tips and gratuities to employees. Employers may not use tips or gratuities for any purpose, except to administer a valid tip pool (discussed below).

Although L&I's guidance states that employers may adopt and enforce a policy prohibiting an employee from accepting tips and gratuities, if a customer leaves a tip despite the policy the employer cannot confiscate the tip. The practical result is that the employee must be allowed to retain the tip, despite the employer's policy.

Tip Pools Are Allowed, But Only for Non-Exempt Employees

L&I's new guidance makes clear that Washington law does not prohibit employers from establishing a mandatory tip pool amongst all employees, as long as the pool does not include individuals who are exempt from the definition of "employee" under the Minimum Wage Act. This means that both front-of-house and back-of-house employees can participate in a valid tip pool, but employers, managers, and supervisors cannot. This prohibition on manager tip-sharing generally aligns with federal tip-pooling laws (see our prior advisory here). However, an additional restriction under Washington law, as interpreted by L&I, is that employees who are exempt from overtime under any exempt classification cannot participate in the tip pool. L&I recommends (but does not require) that employers have written tip pool policies.

According to L&I, managers and supervisors may accept tips, but only for services they directly provide to customers.

Service Charges and Required Disclosures

While tips and gratuities are amounts freely given by a customer to an employee, service charges are automatic charges added to a customer's bill. Service charges have become increasingly popular, particularly in the restaurant industry. Under Washington law, employers are required to provide specific written disclosures regarding service charges.

Employers must disclose what percentage of the service charge is paid directly to the employee(s) servicing the customer (the "employee portion"), if any. This disclosure must be printed on both an itemized receipt and in any menu provided to the customer. If the employer fails to make the required disclosure, the entire service charge must be paid to the employee.

The employee portion of the service charge must be paid only to employees who serve customers (i.e. bartenders, servers, bussers, banquet attendants, etc.) and cannot be distributed to managers or supervisors, or back-of-house employees such as cooks. In addition, under Washington state law, the employee portion does not count toward minimum wage. The employee must be paid at least the state-mandated minimum hourly rate exclusive of and in addition to any service charge payments. The employer portion of the service charge can be distributed or used in any manner the employer sees fit, including distribution to managers or supervisors.

L&I provides examples of appropriate service charge disclosure statements, as well as examples of statements employers should avoid. For example, an appropriate disclosure statement may read, "A service charge of ___%/$____ will be added to your bill. ___% of this service charge is paid to the employee or employees who served you today." If an employer fails to include the second sentence, the entire service charge would be payable to the employee or employees who served the customer.

For employers who retain 100 percent of the service charge and maintain sales-based incentive compensation plans or other types of commission programs, open questions remain. Although this is not addressed in the new guidance, L&I has informally suggested that such compensation programs might need to be disclosed on menus and receipts if the program could be interpreted as being an allocation of the service charge. L&I has also indicated that any such sales-based incentive payments or commissions must be above and beyond the state-minimum wage even if the restaurant discloses that it is retaining 100 percent of the service charge. Given this uncertainty, restaurants should carefully consider these issues.

Payment of Tips and Service Charges and Permissible Deductions

Employers can allow employees to simply retain tips, gratuities, and the employee portion of a service charge. If the employer collects tips, gratuities, or service charges (whe they are paid by credit card, for example), the employer must pay out the employee portions no later than the end of the pay period in which they were earned.

Employers may not deduct cash register shortages or other business expenses from tips, gratuities, or service charges paid to the employee.

Employers are allowed to deduct from a tip or service charge a prorated amount of any transaction fee charged by a credit or debit card processor. For example, a customer leaves a $20 tip on a $100 bill for a total credit card charge of $120. The credit card processor charges a 3 percent fee on the transaction ($120 x .03 = $3.60). The employer may deduct a prorated portion of the transaction fee from the employee's tip: $20/$120 x $3.60 = $0.60.

Best Practices for Employers

• Tip Pools: Develop clear written policies for tip pools, under the guidance of experienced legal counsel. Ask participating employees to sign an acknowledgement confirming their understanding of the policy.
• Tip Pools: Ensure that no managers, supervisors, or anyone classified as "exempt," participate in tip pools. If a supervisor works in both supervisory and tipped positions, employers should exercise caution and seek legal guidance as to whether, and under what circumstances, tip-sharing with the supervisor is permitted.
• Service Charges: Review disclosure statements on menus and receipts to ensure you are disclosing: (1) the total amount or percentage that will be charged to the customer and (2) the portion of the service charge (amount or percentage), if any, that is being distributed to the employee(s) who served the customer.
• Payment: Ensure tips, gratuities, and service charges are being paid to employees in a timely manner.
• Deductions: Review tips, gratuities, and service charge policies and practices to confirm that employees' tips, gratuities, and service charges are not being reduced for cash shortages or any other expenses.