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IRS Bans Automatic Gratuities

The IRS Did Not Ban Automatic Gratuities


IRS Bans Automatic GratuitiesThe media has been frantically reporting the 2014 IRS ban on automatic gratuities in restaurants with the start of 2014.  I have been quoted in articles in newspapers around the country on this issue and have been covering it for over a year.  I have made the same plea to every reporter who contacted me: “Tell the real story.”  Instead, every article has rolled out the talking points provided by the restaurant industry in general and more specifically the National Restaurant Association.  I have to admit that I have never been more disillusioned by even the supposedly “liberal” media than I have in their coverage of the story.

The fact is that the IRS issued a ruling that should have helped restaurant workers.  They stated that automatic gratuities were not tips and therefore could not be applied to cover the difference between the minimum wage for restaurant servers (which has been frozen on the federal level at $2.13 per hour since 1991) and the minimum wage for every other occupation in the United States.  What the IRS said was that restaurants could not apply an automatic gratuity and still pay servers the tipped minimum wage.  Instead of being announced as a victory for restaurant servers, the restaurant industry used the ruling as a way to penalize servers and protect their bottom line.

NPR, MSNBC, and other networks that profess to support the rights of workers and the working class, all just recited the NRA talking points.

Here is the email I sent to a producer this week when contacted for some details on the issue.  The story that resulted from the interview will air this evening on Al-Jazeera America.  I cannot pass judgment on this story, but I sure hope it includes at least some of this explanation.

“ The federal minimum wage for servers is set at $2.13 per hour and has been since 1991 when Herman Cain as President of the National Restaurant Association made an agreement to not oppose min wage increases as long as tipped employees were excluded.  The restaurant is allowed to apply the tips earned by a server as a credit to make up the difference between the $2.13 wage and the minimum wage (some states have decided to raise the server wage, but in 40+ states the server wage is less than the minimum and this type of credit can be used).

The IRS had previously ruled that service charges outlined in a contract like those applied to large pre-planned events (wedding receptions, awards banquets, etc.) are not tips because the guest did not have the option to tip less than the service charge.  Because of this those monies paid in as a service charge could not be used to allow the servers on those events to be paid the lower minimum wage.  If it is not a tip, you cannot take the tip credit and the server must be paid at least the full minimum wage.

In 2012 the IRS issued a ruling that automatic gratuities such as those applied to larger parties, but not outlined in a contract were more like the service charges discussed in the previous paragraph rather than a tip.  Therefore the money left by the guest as an automatic gratuity could not be used for the tip credit and the server would have to be paid the full minimum wage. 

Here is where the NRA spin machine took hold.  Rather than framing the ruling as the IRS intended, restaurants can’t use automatic gratuities to cover wage obligations, the NRA declared that the IRS had outlawed automatic gratuities.  The IRS did nothing of the sort.  Rather than paying the server the minimum wage, restaurants are choosing to remove all protections for servers.  Now they are not guaranteed a tip, but also have to work for the $2.13 an hour that the NRA has fought hard to preserve using the argument that servers will get tips.  If a server does not receive a tip now, the restaurant still pays only the reduced minimum wage and can apply any other tips made in the pay period to make up the difference between that wage and the full min wage.

This ruling affects all of the nearly 2.3 million servers in the US.  1 out of every 60 employed Americans in a tipped server.  Almost 70% are women and a disproportionate number are single moms.  This is why we have a situation in the US where 1 million servers qualify for food stamps and the average wage for a 40 hour week in under $20k a year.  The stats stand in stark contrast to the restaurant owners who plead financial hardship over having to pay the minimum wage that every other employer in every other industry in the United States has to pay.”

The restaurant industry is once again flexing their muscle to preserve their profits over protecting their employees.  There are 2.3 million restaurant servers in the United States, but we are powerless when we buy the lies sold to us by restaurant companies.  The only way we stand a chance of protecting our rights is if the media provides the truth and we use every restaurant blog and social network at our disposal.  The IRS is not the one to blame here.  They did something that should have helped restaurant servers.  Instead the National Restaurant Association changed the message and the media was all to happy to help them hurt restaurant servers.

About David Hayden

Restaurant industry professional helping small restaurants with their training, operations, and marketing needs. Author of Tips2: Tips For Increasing Your Tips and Building Your Brand With Facebook. You can also visit my other websites and blogs at: http://www.tips2book.com http://www.restaurant-marketing-plan.com http://www.themanagersoffice.com http://www.tipssquared.com http://www.foodieknowledge.com http://www.restaurantlaughs.com http://www.tipsfortips.wordpress.com

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