Do you earn tips? Plenty of employees in Montana 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 Montana legal protections for employees who receive tips. You can find out more about Montana minimum wage, tip rules, overtime standards, and other wage and hour issues at the Montana Department of Labor and Industry.
The basic rule of tips, under federal law and state 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. Montana's minimum wage is adjusted each year based on cost-of-living. For the current rate, see our article on Montana wage and hour laws.
Under federal law and in most states, employers may pay tipped employees less than the minimum wage, as long as employees earn enough in tips to make up the difference. This is called a "tip credit." However, Montana law does not allow employers to take a tip credit. Employees are entitled to the full state minimum wage per hour, regardless of how much they make in tips.
Many states 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. Only employees who regularly receive tips can be part of the pool. 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.
In Montana, however, tip pooling is allowed only if employees agree to it voluntarily. Employers may not require employees to share their tips.
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.
In Montana, however, state law provides that service charges that are added to a customer's bill in lieu of gratuities must go to the non-managerial employee who served the customer or prepared the customer's food or beverages. In other words, this money belongs to the employee, not the employer. For the purpose of service charges only, the statute states that this money may be subject to a tip pool. However, the law isn't clear as to whether this tip pool must be by voluntary agreement among the employees or whether the employer may require it.
A 2014 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. Any portion of a mandatory service charge that 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.
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.
Montana law does not address the issue of processing fees directly, although it does say that all tips, including those left by credit card, belong to employees.