Under Washington State law, employers must pay all tips to their employees. This means not taking tips for company use or using tips to pay wages. The practice of "tip crediting,” where employers count tips toward meeting wage requirements, is not permitted. Tips are separate from an employee's state hourly minimum wage and must be in addition to it.
The Washington State Department of Labor & Industries (L&I) recommends employers create clearly written policies for tip pooling arrangements.
Tip pools or tip outs:
Exclude salaried-exempt managers and business owners.
May include employees not directly serving customers, such as kitchen staff and hourly leads.
Tips must be in addition to, not part of, an employee’s state minimum wage.
Employees cannot be required to contribute more to a mandatory tip pool than they received in tips.
Additionally, employees may choose to participate in a tip-sharing agreement. However, employers are not required to help administer these agreements.
Service Charges
A service charge is a required fee that an employer may add for services provided by an employee.
To patrons, a service charge may seem like a substitute for a tip. Therefore, state law mandates clear disclosure of who receives the service charge, which may include mandatory gratuities and delivery fees.
Under Washington State law:
If your business imposes a service charge, it must clearly state on the receipt and menu how much, if any, of the charge goes to the employee providing such services.
If no information is disclosed or if it is unclear, the entire service charge must go to the employee or employees providing the service. (Examples of disclosure statements can be found on L&I's website, labeled as "Tips, Gratuities and Service Charges" in section B.5).
Similarly to paid tips, the service charge paid to an employee is in addition to, and not a part of, an employee’s state hourly minimum wage.
These service charge requirements apply to businesses that offer food, beverage, entertainment, and porterage services, such as:
Restaurants
Catering houses
Convention centers
Hotels/motels or other overnight services
A surcharge unrelated to services provided by an employee, such as a fuel surcharge, late fee, cancellation fee, or parking fee is not considered a service charge.
Paying tips and service charges
Recordkeeping: As employers, you must track the total amount paid to employees each pay period, including tips and their share of service charges.
Payday: As employers, you can choose to allow employees to take their tips and service charges when they are earned, or you can include them in the paycheck for the same pay period.
Deductions: Employers are prohibited from deducting cash register shortages or other business expenses from tips or service charges paid to the employee.
Processing Fees: Employers may deduct only a fraction of the processing fees from tips or service charges paid via credit or debit card.
For instance, if a $10 tip is processed by a company that charges a 1% transaction fee, the employer could deduct 10 cents to account for that portion of the fee.
Taxes on tips and service charges
As an employer, withholding taxes from tips and service charges is required. You should only withhold taxes on the amount employees receive from a tip pool, not on what they contribute to it.
Employers distributing tips or service charges nightly, may include these amounts in the employee's paycheck for tax withholding, reflecting them as both an addition and a deduction since the money has already been disbursed.
The Internal Revenue Service (IRS) provides resources for both employees and employers regarding the required recordkeeping related to tips and service charges for federal tax purposes.
For more information on tips and service charges, please visit: Lni.wa.gov/workers-rights/wages/tips-and-service-charges.
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