The 3 Biggest Payroll Mistakes Restaurants Make

publication date: Jan 24, 2024
author/source: TJ Noa


Payroll might not be the first thing you think about every day when you open your restaurant, but when mistakes happen it can be terrible for business. For a restaurant owner, getting audited by the Department of Labor is like something out of a horror story. Audits can bring down establishments that have been profitable for decades. The food service industry has a massive target on its back because owners do not realize they are making these 3 mistakes that can boil down to a single sentence: You are not paying your employees correctly.

This can mean a lot of different things. We’re talking about regular vs. tipped wages, recording tips, and even paying overtime. If your employees are grossing the correct dollar amount, there are still ways you can improve the way you pay them and record those wages. Let’s talk about regular and tipped wages.

1. Misunderstanding how tipped employees work in regard to minimum wage

The federal minimum wage is $7.25. Without exception, anyone who is legally employed in the US must earn at least that much. All regular wages are paid out at $7.25 or higher. Tipped wages are not an exception, but they are special, and the federal minimum tipped wage is $2.13/hr. The reason this is not an exception, is because everyone earning a tipped wage must still earn at least $7.25/hr after tips. Some states have higher minimum tipped wages, but the important thing here is the distinction between regular wages and tipped wages.

The first thing that sets the food service industry apart is the existence of tipped workers. Consumers have become so accustomed to tipping at restaurants that even when there is no table service, not tipping feels socially obtuse. Tell me part of you doesn’t feel guilty every time you hit “no tip” at the cash register of a fast casual dining experience. The point is restaurant owners are allowed to pay their workers an hourly rate of $2.13 with the understanding that the tips will bring their overall hourly wage to above the federal $7.25 minimum wage. If, for some reason, their tips do not bring their overall hourly wage to above federal or state minimum, then owners need to make up the difference with additional compensation.

Here is a simplified example. Tony is a server, and he earns the federally mandated minimum tipped wage of $2.13 per hour. He worked two five-hour, weeknight shifts and received a total of $40 in tips over both nights. Come pay day, he grosses $61.30 (21.30 + 40). In this exact scenario, the owner has broken the law. If Tony only grosses 61.30, his hourly rate was effectively $6.13. The minimum amount someone can earn for ten hours of work is $72.50 because minimum wage is $7.25. The owner will need to pay Tony an additional $11.20 to make up for the slow nights that he worked.

Some good news here is that your payroll system may do this calculation for you. The bad news is that the system will only catch this if you are entering it correctly. There are often specific earnings you need to use, or specific places to enter hours for the system to double check on your behalf. There is no harm in giving your payroll provider a call or sending an email to make sure things are being calculated correctly. There is harm in hoping that it is being done right, when it is not.

2. Not keeping a proper and accurate tip record

This brings me to the second mistake- keeping a proper and accurate tip record. If you are not capturing every cent your servers are making from tips, the calculation for minimum wage could be causing you to overpay your employees, or worse, you may be paying them accurately, but the records make it look like they are being underpaid. The Department of Labor puts the burden of proof on the employer, so if your records are not airtight, they could be creating a problem for you.

Whether your employees cash out each night or all their tips get paid out on pay date, using your payroll system to keep track of tips is essential. If you are using outsourced payroll, the solution you are paying for should have a simple way to record tips, and automatically use that data to make tax calculations and record it on W2’s.

3. Misunderstanding how overtime works/not paying it out properly

Mistake number three that we see often is restaurant owners who are not paying out overtime, or not paying it out properly. This one gets a little tricky, and that is exactly why it puts a target on the food service industry’s back. It common for an employee to work in multiple positions and sometimes at multiple locations. Let’s say that Tony works 6 hours earning $10/hr in the kitchen on one night, works 7 hours at the bar for $5.25 plus tips the next night, act as a manager on duty at $15 an hour for a 12 hour double, and then works two 10 hour days filling in as a server earning $2.13/hr plus tips. That’s 45 hours in one week. What should his overtime rate be for those five hours? Remember, if you are wrong, you are breaking the law.

Why this matters: back wages can be a backbreaker

If you do not pay your employee enough overtime, you could owe all your employees back wages. Alternatively, you could be overpaying your employees. The most generous overtime calculation in the above scenario would be to pay the overtime hours at $22.50. That would prevent you from needing to pay back wages in the event of an audit, but if you do that for all your employees you could be paying dozens of overtime hours. In an industry where cash flow can make or break you, that is not a sustainable option.

We know that you did not get into the food service industry because you wanted to really crush these parts of your payroll. We know that these are not the secrets you need to ensure that your restaurant will be massively successful. But hopefully, when the big bad wolf comes to blow your house down, you will rest assured, knowing that you were using bricks all along.

TJ NoaTJ Noa is a Client Success Specialist at Whirks, which is an all-in-one People Support System handling Payroll, HR, Benefits and Insurance to help businesses thrive.