Do you earn tips? Plenty of employees in Alaska do, including those who wait tables, serve and mix drinks, open doors, carry luggage, clean hotel rooms, or provide other services, from moving furniture to delivering newspapers. In fact, some employees earn more in tips from satisfied customers than in straight wages paid by their employers.
When you receive tips as part of your compensation, your legal rights under wage and hour laws become a bit more complicated. The rules about what counts as a tip, how much your employer must pay you, and whether you have to contribute to a tip pool (among other things) all depend on the laws of your state. Although federal law also covers these issues, employers must follow whichever law – federal, state, or even local – is the most generous to employees.
Here's what you need to know about federal and Alaska legal protections for employees who receive tips. You can find out more about Alaska’s minimum wage, tip rules, overtime standards, and other wage and hour issues at the Alaska Department of Labor and Workforce Development.
The basic rule of tips, under federal and Alaska law, is that they belong to the employee, not the employer. Employers may not require employees to hand over their tips unless one of these exceptions applies:
Employees are entitled to earn the full minimum wage per hour as set by federal or state law. Alaska's minimum wage is higher than the current federal minimum wage of $7.25 an hour.
Federal law, and the law of most states, allow employers to count an employee’s tips toward its minimum wage obligation. This is called taking a tip credit. However, Alaska is one of the handful of states that does not allow a tip credit. Employers must pay the full state minimum wage, regardless of how much the employee makes in tips.
Many states, including Alaska, allow employers to require tip pooling or “tipping out.” All employees subject to the pool have to chip in a portion of their tips, which are then divided among a group of employees. An employee can't be required to pay more into the pool than is customary and reasonable, and the employee must be able to keep at least the full minimum wage. (In other words, in states that allow a tip credit, the employer can only count the tips the employee gets to take home against its minimum wage obligation.)
According to the federal Department of Labor, only employees who regularly receive tips can be part of the pool. Employees must receive a written notice regarding the tip pool. Employees can't be required to share their tips with employees who don't usually receive their own tips, like dishwashers or cooks. And no employers are allowed in the pool: Tips from a tip pool can't go to the employer or, in some states, managers or supervisors.
Right now, Alaska and the other states in the Ninth Circuit of the federal judiciary (a geographical region that includes the Pacific states) are in a special situation. In 2013, a federal district court in Oregon decided that federal rules on tip pooling apply only if the employer takes a tip credit. Under this ruling, employers who don’t (or can’t) take a tip credit may handle tips and tip pooling as they wish, including requiring employees to share their tips with the back of the house.
Because of this controversy, the federal Department of Labor has said that it will not enforce its tip rules in states in the Ninth Circuit until this issue is decided once and for all. Because Alaska employers may not take a tip credit, this means Alaska employees may be required to share their tips with the back of the house or otherwise participate in a tip pool with employees who don’t receive their own tips or provide service to customers, at least for the time being.
It's not as easy as you might think to figure out exactly how much of what a customer pays is a "tip." If the customer pays in cash and tipping is voluntary, whatever amount the customer leaves over and above the charge for products or services (plus tax) is a tip. However, if the employer imposes a mandatory service charge, or the customer pays by credit card, the rules might be different.
Some restaurants tack a “mandatory service charge” on to bills for large tables of diners, private parties, or catered events. Under federal law and in most states, this isn't considered a tip. Even if the customer thinks that money is going to you and doesn't leave anything extra on the table, your employer can keep any money designated as a "service charge." The law generally considers this part of the contract between the patron and the establishment, not a voluntary acknowledgment of good service by an employee. Many employers give at least part of these service charges to employees, but that's the employer's choice: Employees have no legal right to that money.
A couple of states have different rules, intended to make sure that customers know whether their money is going to the employer or the server. However, Alaska isn’t one of them. Under Alaska law, an employer is free to keep all or part of any mandatory service charge added to a bill.
A recent rule change by the Internal Revenue Service has created a significant incentive for employers to stop imposing mandatory service charges, if the employer hands any of that money over to employees. Starting in 2014, the I.R.S. will begin enforcing a rule that changes the tax treatment of mandatory service charges. Any portion of such a charge the employer pays out to employees must be treated as wages, not tips. This means the employer must withhold and pay Social Security and Medicare (FICA) tax on these amounts, may not claim a credit against its tax obligations for these amounts (as it can for tips), and must include them as part of the employee’s hourly wage when determining overtime payments, among other things.
To the extent employees do not fully report their tip income, employees who receive all or part of a service charge won’t be happy with this change, either.
The rule applies only to mandatory service charges. For the amount to count as a tip rather than a service charge, all of the following must be true:
State rules differ as to whether employees are entitled to the full amount of a tip left by credit card. If the employer has to pay the credit card company a processing fee, some states allow the employer to subtract a proportionate amount of the tip to cover the employee’s “share” of the fee. For example, if the credit card company charges a 3% fee, the employer could legally reduce the employee’s tip by 3% as well.
Alaska has no law that explicitly prohibits employers from requiring tipped employees to share in the credit card processing fee.