Business Legal Tips

Business Legal Tips

Lessons about Paying Wages to Massachusetts Tipped Employees

Mark Bross January 18, 2018

Are you a Massachusetts restaurant, hotel, or similar business?  Are your employees paid tips?  Avoid the mistakes made by a local Cohasset inn and restaurant when paying wages to Massachusetts tipped employees!  Otherwise significant fines may be assessed by the Massachusetts Attorney General or your employees may bring a Wage Act lawsuit.

Red Lion Inn

The Office of the Massachusetts Attorney General Maura Healey (“Attorney General ”) recently investigated a local Cohasset inn, restaurant, and banquet facility, Cohasset Sarro, Inc. d/b/a the Red Lion Inn (“Red Lion Inn”)  for possible wage law violations.  The investigation was sparked by employee complaints about improper tip allocations, paychecks that were short, and company pay records that were incomplete or confusing.

The Attorney General’s investigation revealed that the Red Lion Inn allegedly failed to keep accurate time-keeping records or include tips paid to employees in its payroll records.   Based on Red Lion Inn’s records, however, the Attorney General determined that the Red Lion Inn had not paid employees all of their wages or the correct minimum wage service rate for tipped employees.

As a result, the Attorney issued four (4) citations totaling $22,837 in penalties to the Red Lion Inn:

  • Failure to Pay Wages in a Timely Manner
  • Failure to Maintain True and Accurate Records
  • Failure to Pay State (Service Rate) Minimum Wage and
  • Failure to Furnish a Suitable Pay Stub.

That’s not chump change for a small inn and restaurant in Cohasset!  To avoid penalties like the Red Lion Inn, make sure that your restaurant, inn, or similar business complies with these laws when paying wages to Massachusetts tipped employees:

PAY WAGES IN A TIMELY MANNER

Massachusetts law specifies what constitutes wages and when employees should be paid wages.   Red Lion Inn was cited for failure to pay 2 employees all of the wages owed in their final paychecks and their penalties included restitution for these employees.

According to M.G.L. c. 149, § 148 and 454 CMR 27.02, an employee’s wages include payment for all hours worked, including tips, earned vacation pay, and any earned commissions that are definitely determined, due, and payable.  Hours worked  or “working time” includes all hours that an employee is on duty at your business.  So if employees are required to show up 15 minutes before their shift starts, they must be paid wages for this time.

Hourly employees should be paid weekly or bi-weekly.  The payment deadline  is 6 or 7 days after the pay period ends, depending on how many days an employee worked during  the week.  When an employee quits, he/she must be paid for all wages that are owed on the next regular payday.  If there is no regular payday, the quitting employee must be paid by the first Saturday after he/she quits.  Employees who are fired or laid off, must be paid all wages on the last day of work.

Keep in mind that when paying a final paycheck to an employee, you must pay all wages that are owed!  This includes payment for all hours worked, tips owed, vacation pay, and any earned commission that is definitely determined, due and payable.  Employers commonly fail to pay an employee for all vacation time that is owed.  But if your business promises 1 week paid vacation to its employees, and an employee quits or is fired before taking the vacation, you must pay the employee for all unpaid vacation in the last paycheck.

According to the Attorney General, the Red Lion Inn failed to pay all of the wages owed to 2 employees in their final paychecks.    It’s unclear how the Red Lion Inn short-changed these employees, but avoid underpaying your employees at all costs!!!   The former employee will be upset and may file a complaint with the Attorney General.  The employee may also retain a plaintiff’s attorney to file a Wage Act lawsuit that seeks to recover three time the amount owed + attorneys’ fees and costs.  Treble damages and required attorneys’ fees are a powerful incentive for plaintiff’s attorneys and former employees who have not been paid.  Save yourself the hassle and pay employees all wages in their final pay-check.

KEEP TRUE AND ACCURATE PAYROLL RECORDS

Red Lion Inn was also cited and fined for failing to keep adequate payroll records.   According to M.G.L. Chapter 151, § 15 and 454 CMR 27.07, employers should keep true and accurate records of the following information about each employee:

  • Name
  • Complete Address
  • Social Security Number
  • Occupation
  • Amount paid each pay period
  • Hours worked each Day
  • Rate of Pay
  • Vacation Pay (if any)
  • Any Deductions made from wages
  • Any fees or amounts charged to employee
  • Dates worked Each Week
  • Any other information required by Attorney General

These payroll records must be kept on file for 3 years from the entry date of the record.  The records can be maintained at any of the following locations:  place of employment, a business office, a bank, an accountant or any other centralized location in Massachusetts.  The key is to have the records readily available in Massachusetts so that they can be easily produced upon request.

If an employee requests his/her payroll records, a copy must be provided within 10 business days.  An employee is also allowed to inspect the original paper or electronic records at a reasonable time and place.  If the Attorney General requests the payroll records, certified copies must be provided upon demand under the pains and penalties of perjury!

Although record keeping violations may seem minor; penalties can be severe. Willful violations for a first offense can be penalized by up to one (1) year in prison or a fine not to exceed $25,000, or both.  Subsequent willful violations can be penalized by up to 2 years in prison or a fine not to exceed $50,000.00 or both.

It is unclear how the Red Lion Inn violated its record-keeping requirements or whether its violation was willful.  But the Attorney General was clearly dissatisfied with the quantity of records produced as its press release specifically references the “limited” records that the Red Lion Inn provided to the Attorney General.  Don’t let this happen to your business!

PAY MASSACHUSETTS SERVICE RATE MINIMUM WAGE

The Red Lion Inn was also cited for not paying the Massachusetts Service Rate Minimum Wage to its employees.  According to M.G.L. c.151, § 1 all employees must receive a minimum wage of $11.00 per hour for every hour worked.  This includes employees such as servers and bartenders who customarily receive tips from patrons of your establishment!

However, the minimum wage for any employee who regularly receive tips of more than $20 a month (“Tipped Employees”) is not necessarily paid entirely by the employer.  Instead, a Tipped Employee’s minimum wage consists of two components:

  1. Service Rate:  The hourly rate paid by the employer to the employee.  According to M.G.L. c. 151 § 7, all employers must pay Tipped Employees a service rate of not less that $3.75 per hour (“Service Rate”).
  2. Tips:  The tips that a Tipped Employee receives and retains from customers or are distributed to him/her through a tip-pooling arrangement.

The sum of the Service Rate and the tips received by a Tipped Employee (divided by the number of hours worked) must equal or exceed Massachusetts minimum wage.

Keep in mind that according to 454 CMR 27.02  an employer can only pay a Tipped Employee the Service Rate when the following conditions are satisfied:

  • The Employer  informs the Tipped Employee in writing of the requirements of M.G.L. c. 151 § 7, paragraph 3;
  • The Tipped Employee receives tips which equal or exceed the basic minimum wage when combined with the amount paid by the Employer at the Service Rate for the hours worked; and
  • All tips received by the employee are retained by the Tipped Employee or are distributed through a tip pooling arrangement.

If the conditions are not met, the employer must pay the Tipped Employee enough to ensure that the Tipped Employee receives the full basic minimum wage of $11.00 per hour.

If your business operates a tip pooling arrangement for your Tipped Employees, don’t ignore the requirements of the Massachusetts Tips Act, M.G.L. c. 149 § 152A (“The Tips Act”).  According to this law, tips can only be pooled and distributed among wait staff (including busboys), bartenders, and other service employees in “proportion to the service provided.” Managers and supervisors cannot receive distributions from the tip pool and Tipped Employees cannot be required to share tips with them!

According to the Attorney General, Red Lion Inn failed to pay minimum wage by not paying the required Service Rate to 1 employee.  In light of Red Line Inn’s inadequate records, it was unclear whether the employee earned less than $11.00 per hour once tips were included.  But this was irrelevant to the Attorney General and failure to pay the required Service Rate alone qualifies as a failure to pay minimum wage!  So, be sure to pay all Tipped Employees at least the Service Rate, even if your Tipped Employees make more than $11.00 per hour once tips are included.

Damages and penalties for not paying your employees minimum wage or violating the Tips Act can be brutal.  Willful violations can lead to fines of not more than $25,000 or by imprisonment of not more than one year!  Almost as bad, any employee (or class of employees) can file a complaint against your business under M.G.L. c. 149 § 150 for violating the Massachusetts Wage Act.  If successful, they will be awarded three times the amount owed + attorneys’ fees and costs.  This can easily be more than $25,000 and any lawsuit will be a significant distraction and may bankrupt your business.

ISSUE PAY-STUBS

Red Lion’s last citation was for failure to issue a proper pay-stub to its employees.  This one is surprising because it is not difficult to comply with.  According to M.G.L. c. 149, §148, employers must give employees a pay-stub with their pay that identifies:

  • The name of the employer and the worker
  • The date of payment (month, day and year)
  • The number of hours worked during the pay period
  • The hourly rate
  • All deductions and increases made during the pay period.

Employers cannot charge workers for their pay-stubs.  Electronic pay-stubs are acceptable, but a business must provide a way for employees to print their pay-stubs free of charge.

It is unclear how Red Lion violated this statute.  But make sure that your business issues proper pay-stubs and that you don’t force employees to pay for them.  Willful violations lead to fines of not more than $25,000 or imprisonment of not more than one year!

Hopefully this discussion will help your business avoid the same mistakes with respect to paying wages to Massachusetts tipped employees as the Red Lion Inn.  But these mistakes are not the only employment related issues that can cause legal trouble for your business.   If you want to assess your business employment practices for compliance with federal and Massachusetts laws, please contact my office.  Use the contact form on my website or call me to schedule a free initial consultation.