We have a great restaurant client, whose Board is made up of management team members and investors. One of the investors has not been involved in restaurants before, and uses the term "Number 9" to denote any restaurant-related practice that he has not encountered in the course of his own business.
Well, the #1 Number 9 item that we address with Owners who may not be familiar with the business of restaurants is Tips. In fact, it's such an involved topic, that this Wikipedia page on Gratuity uses 111 references to fully describe it! So let's go to Tipping School and learn how and why Tips make the restaurant business such an odd duck:
1. Tips are defined by labor laws as belonging to the Server or Bartender, i.e. "Tipped Employees," to whom they are given by a Customer. Tips are thoroughly entrenched in the customs of diners in the United States, as described in this historical analysis of tipping. The Customer paying the Tipped Employee by tipping creates a direct, paying relationship between the Customer and the Tipped Employee, in between which the Restaurant Owner is not allowed to participate.
2. Tips are not wages in Minnesota, in that they do not count towards the minimum wage that workers must earn from an Employer. Minnesota is one of seven states that do not participate in the Tip Credit provision. However, for the purpose of payroll taxes, Tips are very similar to regular wages, in that they are taxed the same payroll taxes that regular wages are taxed.
3. Tips are owned by the Tipped Employee to which they are given, and as such, Restaurant Owners are prohibited from telling Tipped Employees what to do with their Tips. Tips do not have to be shared by the Employee to which they are given, meaning the Employee is not obligated to share the Tips with any other Employee, such as Bar Backs, Wait Assistants, or anyone who works in the Kitchen. Restaurant Owners can not tell Tipped Employees that they should share their Tips with other Non-Tipped Employees.
4. In most restaurant environments, the Tipped Employees do share some of their Tips with support Employees, such as the Wait Assistants and Bar Backs who help the Tipped Employees complete their tasks. Although this is not required, and it can not be enforced by the Restaurant, it is a common practice among the Tipped Employees to share their tips with other Front-of-House employees. The Kitchen staff is usually not included in the share.
End of lesson! Next blog we'll talk about how Tips have tipped the hierarchy within the restaurant environment on its ear, making Servers and Bartenders the highest paid people within a restaurant business.
Quick note: Cue the Accountant is hosting a Restaurant Owners Discussion group meeting on Wednesday, September 25th in Minneapolis. If you are an Owner interested in joining the discussion, please reach out here.