Amanda Antell  |  January 20, 2014

Category: Consumer News

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wage and hour lawsuitAutomatic gratuities will now become an even bigger hurdle for restaurants as a new tax policy has officially come into effect.

As of Jan. 1, 2014, the Internal Revenue Service officially made it a requirement for restaurant owners to add automatic gratuities to a server’s wages, or the restaurant can stop charging the customers automatic gratuity altogether. Regardless of the choice, only certain states actually require restaurants to specifically tell the customer whether or not the gratuity charge is for the server or for general management.

The new change is expected to bolster the number of wage and hour lawsuits filed by employees whose employers miscalculate their pay based on mandatory customer charges.

The original ruling came in June 2012, when it was decided that servers in the restaurant industry would no longer be responsible for self-reporting their income from automatic gratuities. The IRS has now made it a requirement that these gratuity fees be automatically added to the server’s wages or the restaurant cannot charge the customer the gratuity fee at all.

“Service charges added to a bill or fixed by the employer that the customer must pay, when paid to an employee, will not constitute a tip but rather constitute non-tip wages,” the IRS said.  “These non-tip wages are subject to Social Security tax, Medicare tax, and federal income tax withholding.”

New Tipping Rules Affect Employee Wages

According to various legal and media sources, many predict that restaurants will discontinue the practice of adding automatic gratuity fees because this will mean less paperwork and higher profit for the restaurant. Many restaurants automatically add tips to the bill of a party of six or more, and casual eateries such as diners or pizza parlors have their own variations of tip collections, such as delivery fees. This practice will change because the IRS no longer classifies “delivery fees” as tips.

This decision came in 2012 when the discrepancy between servers’ wages and their tips was becoming a bigger cause of litigation. This new policy allows for the proper distinction between wages and tips so they can be classified more clearly. However, many restaurants are not happy about this policy, because an employee’s wage income is significantly more expensive than tips. Therefore, many restaurants are choosing to simply remove the automatic charge, rather than increase a server’s pay. Additionally, it would be cheaper for most restaurants to remove automatic charges than to pay increased taxes.

Many servers are also unhappy with this new policy. Due to the new IRS policy, any additional tipping that is not required by the restaurant in any way will be even harder to collect. With customers given the option of not having to pay a service charge, or the restaurant automatically paying the servers, there is a possibility that the common practice of tipping will decrease in frequency. As of January 2014, the IRS defined a tip as the following:

(1)   The payment must be made free from compulsion

(2)   The customer must have the unrestricted right to determine the amount

(3)   The payment should not be the subject of negotiation or dictated by employer policy

(4)   The customer has the right to determine who receives the payment

While there is no question that the IRS ruling will change the restaurant industry tremendously, it remains to be seen how restaurants will adapt to this new rule.  Regardless, servers are encouraged to ensure that they rightfully are collecting their wages, and to make sure their wages match up with their hours worked.

Free Help for Wage & Hour Complaints

If you were paid with a mandatory service charge within the past four years and believe it may have negatively affected your minimum wage or overtime pay, you have rights under federal wage and hour laws. Obtain a free case evaluation by filling out the short form at the Service Charge, Wage & Hour Class Action Lawsuit Investigation. One of the skilled employment lawyers working with Top Class Actions may be able to help you get the money you’re owed, at no out-of-pocket cost to you.

 

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One thought on New IRS Service Charge Rule Takes Effect

  1. David Sauerwald says:

    Since the definition of Auto gratuity changed many Restaurants including the one I serve at did away with it. My Restaurants specifically will cater to parties of more than 6 and accrue bills of over $120.00. We have an association and agreement with the staff that 1% of our sales go to a tip out of food expedition, Bussing, bartending. That is 3% of our sales in total we agree to pay out of our gratuities based on sales that goes towards paying others. It is not mandatory but necessary. I and other co-workers have had multiple tables where the party of 30 has a bill of 1000 and leaves $6 tip. On that party if it was there for 2 hours at the hourly rate of $10.50 wages provide that I made hourly $21.00 with those $6 in tips equalling $27.00. Through a necessary association of employee relationships I am thereby in all practicalities in debated to my co-workers that shift ( e.g.runner, busser, bar) $24.00. Taking into account that my paycheck will provide me later in 2 weeks $21.00 I will have owed $-3.00 by serving that table. Now imagine this happening over and over again. Different sized tables, different sized checks. It adds up and truly places the burden of tax on the employee. I believe their change in language caused an unintended yet ever present breach of my 13th amendment right to not be an indentured servant. I can only imagine what the effect has been in states where server’s minimum wage is $2.13 still. Slavery now exists in restaurants around the country. The consumer should have a compulsory gratuity if they know it ahead of time and seeing as management can not handle another servers gratuity the appropriations of a %20 gratuity should be at the servers discretion not the consumers if time was spent in that servers station where opportunities to take parties of 5 or less would allow the server to make money where as a table that doesn’t tip is really loitering and further robbing the server of more potential income. The IRS must be sued for creating a slave trade.

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