“I’m opening a salon this summer, but I’m confused about the minimum wage requirements. The Department of Labor’s definition of a tipped employee reads, ‘A tipped employee means any employee engaged in an occupation in which he or she customarily and regularly receives more than $30 a month in tips.’ 

Section 3(m) of the FLSA permits an employer to take a tip credit toward its minimum wage obligation for tipped employees equal to the difference between the required cash wage (which must be at least $2.13), and the federal minimum wage. Currently, the maximum tip credit an employer can claim under he FLSA is $5.12 per hour. 

Can salon professionals be considered tipped employees for the purposes of offsetting the minimum wage requirements?”

Possibly, but I advise against claiming a tip credit for several reasons.

First, in a world where people can do basic math and set their prices appropriately, I don’t agree with the notion that customers should be expected to compensate the employees of a business on top of their charges for patronizing that business. It doesn’t make sense to me that a business owner would permit customers to determine whether or not their employees were deserving of payment, choose how much payment the employee deserves, or trust their employees to accurately report tip income when it benefits them not to do so. Wages are a cost-of-doing-business expense, and the employer should be building that expense into the prices of their services or products and shifting it onto the customer directly; not making it optional.

Employees deserve guaranteed income. I personally wouldn’t leave their financial welfare in the hands of a customer.

The practice itself seems inefficient when the alternative (structuring prices correctly), doesn’t require an employer to rely on an employee’s honest reporting or calculate anything.

There’s an argument that tipping is discriminatory and may be unconstitutional, also. An interesting (and pretty reasonable) stance. I recommend listening to the episode of Freakonomics, “Should Tipping be Banned?” for more insight on that. I wouldn’t want to have to deal with the liability of that, especially as more evidence supports that argument.

I consider the expectation of tips and the application of service fees (autogratuities) to be deceptive, and many others do too. To advertise a haircut at $50 but to then apply a $20 automatic gratuity to the bill is deceptive marketing and may put you in a questionable legal position. It doesn’t make sense to do that. Just set the price at $70 and be done with it.

How would you present this tip credit policy? Should you decide to claim tip credits, you’ll have to disclose that to your prospective employees. I don’t know of any licensed professional who will agree to being paid $2.13 an hour and having the employer use their tips to offset any prevailing wage obligations.

I’ve always considered the custom of tipping at odds with the notion that we are skilled, educated professionals.

Mostly, my dislike of tips stems from my position that we’re professionals.The idea of accepting gratuity, to me, runs counter to that. When I think of a tipped profession, I think of entry-level, low-wage jobs that require little to no training to perform: waitstaff, baggage handlers, valets. We’re not untrained, and our jobs certainly aren’t entry-level. (To be clear, I’m not belittling any salon professional who accepts tips as being “unprofessional.” I simply believe salon owners should take charge of their workers’ income instead of relying upon tips to offset their prevailing wage obligations, especially since customarily tipped employees are capable of generating tips at a much faster rate than most salon professionals.)

Skilled professionals in other industries aren’t given tips, especially appointment-based professionals. Can you imagine handing a tip to a marriage counselor, psychiatrist, lawyer, or doctor? Now, we’re definitely not doctors or lawyers, but they too are essentially in skilled, service-based professions. Instead of being handed a few extra dollars, I’d rather charge appropriately, have customers pay my rates, and tell them to keep their change. The no-tipping policies I’ve implemented have been extremely well-received by customers, most of whom consider the tip calculation and distribution process stressful and awkward.

My final grievance with tips is the hit a worker takes to their morale when they aren’t tipped well, or at all, by a customer. I would never give a customer that kind of control over my employee’s self-esteem or professional worth. Nothing is worse than seeing an employee in the back room after a four hour color correction, pissed off, confused, and sad because the guest she just spent all that time with left the tip line blank, or handed her $3 before she pranced out the door.

I take that back. The only thing worse than seeing that upset employee is hearing an entitled employee huff and puff about how she “won’t go out of her way” for a client who doesn’t tip well.

OUTSTANDING SERVICE SHOULDN’T BE REWARDED. IT SHOULD BE EXPECTED.

So, those are my reasons for why I not only discourage tip credits, but the custom of tipping overall. If you’re insisting on moving forward, I recommend contacting a CPA and an attorney for guidance implementing it.

“My boss didn’t report my tips and now I’m paying for it. For the last five years, my salon owner told me that it was ‘better for me’ if I didn’t report my tip income. She complies with the law by tracking hours and making sure I get paid at least minimum wage each pay period, but told me to keep my tips to myself. Initially, I thought this was great, but now I’m trying to buy a house and I can’t qualify for financing because my W-2’s don’t reflect my true income. What can I do?”

Always, ALWAYS declare your tips, no matter how little the amount. Tips are considered income by the IRS, and while most beauty workers balk at the thought of taxes being taken from them, the truth is that their employment taxes directly fund employee benefits like FUTA (unemployment insurance), Workers’ Compensation, Social Security, and Medicare. Your employer pays the FUTA themselves, but they’re required to match your FICA (SS and Medicare). It benefits you to take advantage of that matching as much as possible!

Don’t screw your future for tax-free cash now.

If a retirement savings doesn’t motivate you, perhaps the threat of penalty will. The IRS audits service workers more often than the average taxpayer. They know when you’re not accurately reporting. They’re watching. Waiting. They’re like Santa, except their list only has naughty tax evaders on it, and instead of delivering presents, they deliver collection notices for penalties and fees. So, not really like Santa, more like an expensive pain in the ass you would probably prefer to do without.

You’d be surprised how quickly those “little amounts” add up over the course of a year. Even if we assume you were only bringing home $50 a day in tips, working four days per week, that’s $10,400 per year.

When you apply for a loan, lenders look at your reported income. They’re not going to take your word when you insist that you make an additional 15-20% a year in tips. All income must be verifiable, which means that it has to appear in the tax returns. The more income you can prove, the more likely you’ll be to secure that loan.

That $10,400 can be the difference between qualifying for a mortgage and being resigned to rental for the next few years.

Unless you kept a daily tip record, trying to amend your tax returns will be nearly impossible. Additionally, your employer will have to make up their portion of the unpaid taxes on that income. If you want to move forward with it, you’ll have to contact a CPA or tax attorney–or both.

That’s a messy situation. From today on, start reporting those gratuities.

“I LOVE the idea of not accepting tips anymore! How can I implement a no-tipping policy at my salon? Will my employees be okay with it?”

A lot of businesses are moving away from tips, and salons are certainly jumping on that bandwagon. I receive this question almost daily.

Because many salon owners don’t properly structure their pricing to balance their overhead expenses, I recommend doing that first. Once you know what your salon’s hourly operational costs are, set the prices for the services to accurately reflect them, and balance them so they meet the value of the service itself.

There are several ways to offset the lack of tip. I recommend raising base wages. If you’re on a tiered-commission bonus structure, the commission rewards will automatically increase because the higher service prices will enable professionals to hit their goals much faster. However, some owners will just automatically divert a set percentage of each ticket to the employee’s paycheck, and some owners prefer to transition by implementing service fees so that the employees can physically see the “auto-gratuity” amount. If you choose that method, you can build an extra 15-20% into the stated prices and bill it as a service charge on the receipts and pay that directly to the employees.

To clarify, this means that the prices on your brochure will read $50 for a particular service, but the receipt will break it down as $40 for the service, $10 for the service fee; not that the price list will read $40 and the service fee will be tacked on at checkout.

Keep the pricing clear.

As stated in the tip reference post, check with your state regarding how service fees are to be disclosed with customers.

(Personally, I recommend against service fees. They leave tend to leave a sour taste in customers’ mouths, and overcomplicate the process. It’s preferable to just provide a detailed wage statement showing the bonuses.)

Once you’ve determined your new prices, make an announcement to the clients that tips are no longer accepted at your salon.

When presenting the plan to the employees, explain the ways in which the new policy will benefit them. No longer will they have to rely on customers for income. Never again will they have to deal with a rude client who demands the world and tips them pocket change (or nothing at all). They won’t have to deal with tip tracking and reporting anymore. Their W-2’s will state their actual income. All of you will be less likely to be selected for a random audit.

Sure, some professionals won’t accept the policy, and that’s fine too. You determine how the business is run and they determine whether or not your management works for them. If it doesn’t, that’s alright. Let them go with a letter of recommendation. No harm, no foul.

Ultimately, both of you have to do what’s right for you, and if eliminating tipping in your business and guaranteeing your employees solid income instead feels like the right choice, absolutely go for it.