Archives for January 2014

New IRS Tax Rule on Restaurant Tips may Conflict with Massachusetts Law


Beginning January 1, restaurants that add service charges to customer bills were required by IRS regulation to treat the payments as employee wages rather than tips, as most previously had. The employers now must pass the funds through payroll systems and make deductions for taxes and the like before delivering them to their workers.  Because that process could take two weeks, the regulation may lead restaurants to violate Massachusetts law.

Under the Massachusetts tips statute, “Any service charge or tip remitted by a patron or person to an employer shall be paid to the wait staff employee, service employee or service bartender by the end of the same business day, and in no case later than the time set forth for timely payment of wages under section 148.” The outer limit for payment might be stretched to 6 or 7 days after a service charge is paid, though most employers remit tips at the end of every shift. Restaurant employees generally expect and rely on the quick payments to gets their money into their own pockets, without deductions, to cover living expenses.

Under prior practice, the money was of course reported by employers to the IRS, but employees were left to declare and pay their own taxes on tips annually. The change in law is apparently aimed at improving tips reporting and increasing tax revenues. In addition to the timing issue it creates for Massachusetts restaurants, the new regulation may add costs and administrative headaches for them. Employer payroll tax obligations may increase, and hourly wages may fluctuate widely from day to day, making overtime calculations difficult. The net effect of all this could be that restaurants will drop the practice of adding service charges to bills, a decision that could in turn cause wait staff to receive less pay. Restaurants commonly add an 18% gratuity to the food bills of larger parties. Whether those parties will voluntarily pay the same tips is an open question.

Paying Employees under the Massachusetts Wage Act

A Seemingly Simple Part of Running a Business has become a High Stakes Game as Employee-Friendly Rules and Automatic Penalties Wreak Havoc on Employers

One way to sum up what Massachusetts wage laws can mean for employers is via a variation on the old saying, “pay me now or pay me later.” The rule of thumb here may be best stated as, “pay me now or pay me triple,” maybe even after you paid what we agreed on.

Real life examples are easy to find. There’s the sole proprietor facing a $35,000 wage claim for damages of almost $200,000. Then there is the well-paying, 40-employee firm staring at a multi-million dollar judgment. And the corporate owner who mortgaged his family’s home to avoid losing his business. Common to all are unwitting transgressions of the Massachusetts Wage Act.

Understanding the Act’s rules is essential to running a business in Massachusetts, where wage laws are friendly to workers and carry heavy automatic penalties for even honest mistakes. Employers must understand how and when to pay their workers. Those who don’t may one day face claims big enough to close their business’s doors. [Read more…]

Court Sees Haven for Delivery Company that Uses Independent Contractors

Pointing out that “legitimate business-to-business relationships” are not barred by the Massachusetts Independent Contractor statute, a superior court judge held recently that a delivery company would not be liable for damages under the law if the contractors it uses to make deliveries in fact operate their own delivery businesses.

In typical fashion, the plaintiff’s class action counsel argued at summary judgment in the case Okeke v. Dynamex Operations East, Inc. that drivers who make deliveries for the company must be considered employees under a portion of Mass. Gen. L. ch. 149, s. 148B, the Massachusetts Independent Contractor statute. The law holds that workers who perform duties within the usual course of business of the entity they work for are employees and not contractors as a matter of law. While the argument has frequently persuaded courts in the past, it did not in the Okeke case, in which the judge cited evidence that some drivers operated businesses and employed as many as 17 others to make deliveries for Dynamex.

“Were the plaintiffs’ interpretation of section 148B to prevail, no corporation operating in the Commonwealth could contract with another corporation to perform work in the same field. Under the plaintiffs’ view, the latter courporation would be an employee of the former, because its services would be provided in the former corporation’s usual course of business,” the court wrote.

The decision seems to turn on particular facts that may not exist in all cases. The use of independent contractors to perform delivieries is common in the delivery business. The simple formation of a corporate entity to nominally “employ” a driver and receive his/her pay is likely not enough to defeat application of the Independent Contractor statute. Where as in Okeke a contractor employs numerous drivers himself, however, the situation may be different as long, at least, as the employer properly pays workers under applicable wage and other laws.