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Breaking Down the Trickier Aspects of Massachusetts Laws

Jul 26, 2021

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Some Tips on Tips

Breaking Down the Trickier Aspects of Massachusetts Laws

By Ludwell Chase and Amy B. Royal, Esq.

State and federal laws pertaining to minimum wage, tips, overtime, and employing minors are complicated. As a result, these are areas where mistakes are often made.


Employers, however, cannot afford these errors because the consequences of not complying with these laws can be very costly. In fact, in Massachusetts, there are mandatory treble (triple) damages for violations of wage-and-hour laws relating to minimum wage, tips, and overtime. This means that, if an employer is found in violation of state law, at a minimum, for every dollar an employer does not pay in accordance with wage-and-hour laws, that employer will have to pay three times that amount.


Under Massachusetts and federal law, employers are allowed to pay employees who receive tips an hourly wage that is lower than the minimum wage. This works by allowing employers to take a ‘tip credit’ for a certain amount in tips that the employee earns. The employee must not make less than minimum wage when their tips and hourly wage are combined. Under the federal law, the Federal Labor Standards Act, all hourly workers must be paid the federal minimum wage of $7.25. Tipped workers may be directly paid $2.13 per hour if their tips and hourly wage combined are at least equal to the minimum wage. In other words, employers can claim a ‘tip credit’ of $5.12 per hour.


The U.S. Department of Labor (DOL) recently released new proposed regulations for tipped workers that reinstate the 80/20 rule. This rule limits the amount of time tipped workers can spend performing activities that are related to tip-generating duties, while their employers can still claim the tip credit. Tipped workers must spend at least 80% of their time performing directly tip-generating activities, such as serving customers, and no more than 20% of their time performing not directly tip-generating activities, such as setting tables. This rule was previously in effect but was replaced by DOL guidance in 2018.


The 2018 guidance provided that employers could claim the tip credit if non-tipped duties were performed at the same time as tipped duties, or if the non-tipped duties were performed for a reasonable time before or after tipped duties. This new proposal returns to the 80/20 rule. In addition, the new proposal specifies that, if an employee performs non-tipped activities for 30 minutes in a row, the employer cannot pay the employee the lower tipped hourly wage for that time.


For employers with tipped workers that are subject to federal wage-and-hour law, this proposal is a good reminder that they need to pay attention to these potential changes and their effects on how they compensate employees.


Caution on the Menu

Massachusetts has its own complex laws relating to tips, minimum wage, and overtime. As a result, these are areas where it is easy for employers to make mistakes. Therefore, employers need to pay special attention to ensure they are complying with both state and federal laws. As of Jan. 1, 2021, the minimum wage in Massachusetts is $13.50 per hour. Massachusetts is incrementally increasing the minimum wage in order to reach a $15 minimum wage by 2023. For now, employers may pay workers who make at least $20 a month in tips a tipped hourly wage of $5.55 and take a tip credit of up to $7.95 per hour, for a combined minimum wage of $13.50.


The Massachusetts Tip Law mandates that all tips must be given to employees whose work directly generates tips, and that employers and managers may not keep any portion of their employees’ tips. The law applies to three categories of employees: waitstaff employees, service bartenders, and service employees. Waitstaff employees include waiters, waitresses, busboys, and counter staff who serve beverages or food directly to patrons or clear tables, and do not have any managerial responsibilities. Service bartenders prepare beverages to be served by another employee. Service employees include any other staff providing service directly to customers who customarily receive tips but have no managerial responsibilities. For the purposes of this law, managerial responsibilities are duties such as making or influencing employment decisions, scheduling shifts or work hours of employees, and supervising employees.


Massachusetts law allows for ‘tip-pooling’ arrangements. This means all or a portion of tips earned by waitstaff employees are pooled together and then distributed among those employees. Employers must be cautious when administering a tip pool and ensure that only waitstaff, service bartenders, and service employees are being paid from the pool. This means managers and back-of-house employees like cooks and dishwashers cannot share in tips. Even employees with limited managerial roles who also directly serve patrons are not considered waitstaff employees on days when they perform managerial duties.


When employees do not receive enough in tips to make up the difference between the tipped hourly wage and the minimum wage, employers must pay the difference. Employers are required to calculate tipped employees’ wages at the end of each shift, rather than at the end of the pay period. This requires employers to keep track of how much workers receive in tips for each shift. This may also require employers to pay their tipped employees additional amounts in order to compensate for slow shifts.


Under Massachusetts law, certain businesses, including restaurants, are exempt from paying employees overtime; however, they may not be exempt under federal law. If subject to federal law, employees working in restaurants must be paid one and one-half times the minimum wage (not one and one-half times $5.55 per hour) for all hours worked in excess of 40 hours per week.


Under the Massachusetts Tip Law, if a restaurant includes a service charge, which serves as the functional equivalent of an automatic tip or gratuity, all the proceeds from that service charge must be paid only to waitstaff employees, service employees, or bartenders as a tip. Employers may, however, charge a ‘house fee’ or an ‘administrative fee,’ which they may use or distribute at their discretion, but only if it is clearly stated to customers that the fee is not a tip, gratuity, or service charge for tipped employees. Thus, any fees not intended as gratuities and not paid solely to tipped employees should not be labeled as a service charge.


Food for Thought

These complexities are especially important to Massachusetts employers, given that the consequences of failing to comply with wage-and-hour laws can be costly, and the penalty is the same regardless of whether the employer violated the law willfully or by mistake.


Considering the consequences of violations, businesses with tipped employees should regularly consult with their employment counsel to review their practices and policies to ensure compliance with state and federal law.


Ludwell Chase and Amy B. Royal work at the Royal Law Firm LLP, a woman-owned, boutique, corporate law firm; (413) 586-2288; aroyal@theroyallawfirm.com

This article was published in BusinessWest.

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Effective January 1, 2024, all businesses conducting and engaging in business within the United States, have one more requirement to add to their list. The Corporate Transparency Act (“CTA”), was passed by Congress in 2021, and recently took effect January 1, 2024. What is it? The Act requires businesses to report their “beneficial owners” to the government through a Beneficial Ownership Information (BOI) report. A “beneficial owner” is someone who owns 25% or more of the business or exercises substantial control over it. The reports are made to the United States Treasury Department’s Financial Crimes Enforcement Network (FinCEN), which has been tasked with maintaining a national registry of beneficial owners of the reporting companies. Why was this passed? The Act is Congress’ attempt to prevent money laundering, terrorism financing, tax fraud, and other illicit activities including human and drug trafficking and securities fraud (aka prevent shell corporations and hiding money). While shell corporations are not illegal, they can be used to engage in activities that shield entities from legal liability, which is disfavored by the government and courts. Certain circumstances actually benefit from the use of a shell corporation, i.e. where companies seek to take advantage of doing business “offshore.” However, the “bad actors” who abuse this business structure have used such strategies for personal gain and, according to the government, hide from legal liability. Who does it effect? The new reporting requirement affects all businesses, corporations, and LLCs, no matter how big or small. It also affects non-US entities that are registered to conduct business with any state or territory within the United States. How do you comply? To remain in compliance with the reporting requirement, business must file the report by year end of 2024. If you create a business this year, 2024, but before January 1, 2025, you will have 90 calendar days after receiving notice of the company’s creation or registration to file the initial BOI report. Notice is actual notice received or public notice by the secretary of state, whichever is earlier. Failure to comply could lead to financial penalties or jail time. Such penalties include felony convictions, $500 daily (for every day of non-compliance) penalty up to $10,000, up to two years in prison. If your business has any questions on this topic or any other matters, please do not hesitate to contact the attorneys at The Royal Law Firm at 413-586-2288.
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