Payroll Compliance Guide

Restaurant operators are responsible for ensuring compliance with all federal and state regulations. Among those responsibilities are a collection of laws governing how payroll and tips must be processed by the business. From calculating earned wages to withholding taxes, payroll compliance requires a firm understanding of the relevant laws.

Here we’ve assembled summaries of the requirements for restaurant operators. Review the information below to help ensure your payroll process meets payroll compliance standards.

Payroll Compliance: Calculations and Processing

While most restaurants and chains utilize payroll processing bureaus, there is still a whole lot for the operators to know about staying compliant. Each state may have separate requirements, and the specifics may vary depending on where you are located. Below are some of the highlights:

• Accurate Calculation of Gross Pay: While the easy part is determining how many hours the employee worked and multiplying by the rate of pay, much more goes into an accurate calculation. In most states, employers must provide a detailed pay stub to employees showing these calculations and should include separate line items for:
  • Earned income
  • Each pay rate and the hours worked at that rate or the salary for the period
  • Overtime hours worked (weekly, daily) and the premium amount for the overtime
  • Split shift, minimum shift, spread of hours, or shift differential premiums
  • Other pay that might include: sleeping time, on call, or meeting time
  • Holiday pay
  • PTO or vacation pay, including the accrual and balance on each pay stub
  • Sick pay or family leave pay, including the accrual and balance on each pay stub
  • Fair Workweek predictability pay or rest between shift pay
  • Missed break penalty pay (California only)
  • Service charges (mandatory charges) that are separate from tips
  • Bonus payments
  • Retro pay adjustments
  • Expense reimbursements
  • Loans or advances
  • Tip shortfall pay (if the tips reported for the week do not bring the rate to minimum wage)
  • Tips, which are often split between:
    • Credit card tips
    • Cash tips
    • Indirectly received tips (tip outs from other employees)

• Deductions from Pay: Likewise, paystubs should note all deductions from pay, including:
  • Required statutory deductions
  • Federal and state income tax based on the tax forms supplied by employees
  • Social Security and Medicare tax also known as the FICA tax
  • State-sponsored disability insurance deductions
  • Wage garnishments and child support payments
  • Voluntary and employee benefit deductions. These may be pre-tax or post tax depending on the plans in place
  • Retirement Plan contributions (IRA, 401(k), etc.)
  • Health Plan, Health Savings Account (HSA), Flexible Spending Accounts (FSA), or other employee voluntary plans
  • Union dues, charitable contributions, uniforms, etc.
  • Reimbursement for purchases or meals
  • Employer loan repayments
  • Earned Wage Access (EWA) payments received during each pay period

• Pay Frequency and Lag Time Requirements: State wage payment laws control how often employees must be paid as well as how soon they must be paid after they perform services for an employer. The federal Fair Labor Standards Act (FLSA) only requires that an employer pay its employees “promptly” and by the established regular pay day. Examples of state requirements include:
  • Frequency:
    • Colorado: At least monthly or every 30 days, whichever is longer.
    • Washington DC: Nonexempt employees must be paid at least twice a month FLSA-exempt employees must be paid at least monthly.
    • Massachusetts: Nonexempt employees must be paid at least weekly or biweekly.
  • Lag times: How soon after the work week must an employee be paid?
    • California: For nonexempt employees, wages earned between the 1st and 15th of the month must be paid between the 16th and the 26th day of the same month. Wages earned between the 16th and the last day of the month must be paid between the 1st and the 10th day of the following month. Other, more frequent payroll periods, such as weekly, biweekly, or semimonthly when the earning period is something other than between the 1st and 15th and the 16th and last day of the month, must be paid within seven calendar days of the end of the payroll period within which the wages were earned.
    • Connecticut: Payment may be held up to eight days.
    • Montana: Payment may be held up to sixteen days.
  • Permitted Methods of Payments: The FLSA states that pay is paid “in cash or negotiable instrument at par” which historically meant by check but now allows for direct deposit and pay cards. The options for payment include:
    • Cash: This is very rarely used and administratively difficult. Historically, most restaurants paid out tips in cash, either daily or weekly, but with the vast majority of restaurant purchases paid by card, restaurants hold very little cash on hand. Technology solutions can help distribute digital tip payments to staff without the need to hold cash on site. In some restaurants, tips paid to employees in cash may be taken home at the end of each shift.
    • Physical Paychecks: These are historically popular, but physical paychecks are nearly extinct due to the administrative burden, cost of management, and slower time for payment to reach the employees’ bank accounts. However, only 20 states (with exemptions and limitations) have the power to make direct deposit mandatory. For the remaining states, employers must issue paper paychecks if the employee chooses not to enroll in direct deposit.
    • Direct Deposit: This is the most common form of payment today. Employees typically enroll through an online payroll portal or by filling out a paper form with their bank account information. The net pay funds are deposited to their accounts on payday. Employees are usually offered the option to deposit to multiple accounts based on dollar amounts or percentages with the option to make changes as needed.
      Some states empower employers to mandate that employees enroll in direct deposit:

• • • • Alabama: Private sector only
      • Indiana
      • Iowa with some limitations
      • Kansas
      • Kentucky
      • Louisiana
      • Maine
      • Massachusetts
      • Michigan
      • Minnesota: Private sector only; Public sector at discretion of the Commissioner of Labor & Industry
      • Missouri
      • New Jersey: Public sector only
      • North Carolina
      • North Dakota
      • Oklahoma
      • South Carolina
      • South Dakota
      • Tennessee: Employers with over four employees
      • Texas
      • Utah with some limitations
      • Washington
      • West Virginia: State institutions of higher education
      • Wisconsin
    • Pay Cards: Paycards are another common pay method permitted in all 50 states. Paycards are popular especially for employees that do not maintain traditional bank accounts, such as minors.Depending on the card in question, pay cards can be backed by major card companies and act as debit cards. The funds used are deposited on the cards much like direct deposit. Employees may use pay cards, the same as traditional bank cards to make purchases or pay bills as well as to draw cash from an ATM. Paycards are also common methods to pay out tips to employees, often as soon as the day following a shift.

Earned Wage Access (EWA)

Earned wage access enables employees to receive a portion of their paycheck before their scheduled payday. It provides employers the ability to partner with an EWA vendor to offer a “pay-as-you-go” or “on-demand payment” model. Regulations around EWA are evolving rapidly to address concerns around the benefit. Namely, regulations seek to increase transparency and prevent predatory payday loan vendors from posing as EWA providers. For that reason, much of the legislation concerns licensing for EWA providers.

Outlining EWA Regulations

Federal Regulations

In 2024, the 118th Congress introduced the Earned Wage Access Consumer Protection Act. If passed, this regulation mandates a no-fee option for EWA along with strengthened consumer and employer disclosure requirements. We expect this regulation will drive more adoption of EWA in the workplace as employees seek to relieve financial stresses.

State Regulations

As of January 2025, regulations around EWA at the state level have begun to shift with seven states imposing or proposing licensing requirements. Meanwhile, the remaining states have not yet regulated EWA providers. In these states, EWA services operate without state-specific licensing, but providers must comply with federal laws and general state financial regulations.

States that require licensing include:

• Nevada: Nevada became the first state to officially regulate EWA providers, establishing a statutory framework that includes licensing requirements.
• Missouri: Following Nevada, Missouri enacted legislation in August 2023 to regulate EWA services and require licenses for providers.
• Wisconsin: In Wisconsin, EWA providers must obtain a license through the Nationwide Multistate Licensing System & Registry (NMLS).
• South Carolina: Enacted legislation in November 2024 mandating that EWA providers obtain proper licensing to operate within the state.
• New York: New York introduced Assembly Bill 258 in January 2025 with the aim of regulating EWA services If passed, licensing will be required for EWA providers.
• Arizona: Introduced in January 2024, a Senate bill proposes licensing requirements for EWA providers operating in Arizona.
• Florida: Florida also introduced a Senate bill in January 2024 seeking to establish licensing mandates.

Note that the regulatory environment for EWA services is rapidly evolving. Providers should stay informed about both current laws and pending legislation in each state to ensure compliance.

Tips and Service Charges

Tipped employees are those working in occupations that “customarily and regularly” receive more than $30 in tips per month (some state have higher thresholds). If an employer chooses to pay the reduced rate “tip credit provision”, they must:

• Notify the employee in advance, typically as part of onboarding notifications
• Track the tips received by employees to demonstrate that the full minimum wage is earned each week and report each pay period on the employee pay stub. The employer must pay the difference (up to full state minimum wage) to the employee if the tips do not satisfy the weekly requirement.

What Are Tips?

Tips are discretionary (optional or extra) payments determined by a customer that employees receive from customers. Tips include:

• Cash tips received directly from customers
• Tips from customers who leave a tip through electronic settlement or payment. This includes a credit card, debit card, gift card, or any other electronic payment method.
• The value of any noncash tips, such as tickets or other items of value
• Tip amounts received from other employees paid out through tip pools or tip splitting or other formal or informal tip sharing arrangements.

Three factors are used to determine whether a payment qualifies as a tip. Normally, all three must apply to be considered a tip. The customer generally has the right to determine who receives the payment, and if any one of these criteria does not apply, the payment is likely considered a service charge.

Qualifications include:

• The payment must be made free from compulsion.
• The customer must have the unrestricted right to determine the amount.
• The payment should not be the subject of negotiations or dictated by employer policy.
• Other factors:
  • The FICA tax (employer match) paid by the employer is credited back to the employer on the employer’s tax return.
  • All tips must be distributed to employees and no portion may be retained by the employer.
  • Employers may withhold an amount equal to the estimated cost of credit card fees if customers pay the tips with credit cards.

What Are Service Charges?

This refers to the amounts an employer requires a customer to pay for products or services. This is true even if the employer or employee calls the payment a tip or gratuity. Examples of service charges commonly added to a customer’s check include:

• Standard charge on all bills. These were popularized in 2020 – 2021 during Covid-19 shutdowns.
• Standard “health and wellness” charges. This charge is often 4 – 5% to “cover the cost of benefits for employees.”
• Large dining party automatic gratuity
• Banquet event fee
• Cruise trip package fee
• Hotel room service charge
• Bottle service charge (e.g., at nightclubs and restaurants)

Generally, service charges are reported as non-tip wages paid to the employee. Some employers keep a portion of the service charges. Only the amounts distributed to employees are non-tip wages to those employees.

Other factors:

• The FICA tax (employer match) paid by the employer is not eligible for a credit and is a cost on to the employer.
• The service charges are considered wages and therefore must be included in total wages for calculating overtime pay.
• Service charges are typically paid out to employees on paychecks and not cashed out at the end of the shift.
• Service charges are typically considered taxable sales to the restaurant and subject to sales tax.

The rule known as 80/20/30 was overturned in October 2024. The rule required employers to monitor the amount of time a tipped employee was doing “tip supporting tasks,” such as rolling silverware or prepping tables. If the employee was engaged in more than 20% of the week’s hours or more than 30 consecutive minutes in non-tippable work, the employee would be entitled to receive the full minimum wage for that period.

Employers are still required to monitor employee work assignments and only apply tip credit for legitimately tipped jobs.

Compliance Violation Story: $105k in Back Wages, Damages, and Penalties for Overtime Violations

Boludo Co. and its owners were found to have violated the Fair Labor Standards Act by depriving 51 employees of their overtime pay and firing one employee after speaking with investigators. Their specific infractions included adding managers and shift supervisors to the tip pool, not combining hours their employees worked at more than one location, allowing employees to use alternative names when clocking in to avoid overtime, and other similar infractions.

Boludo Co. was required to pay out $44,915 in back wages as well as an equal amount in liquidated damages. On top of this already large penalty, the organization was forced to pay $15,954 in civil money penalties.

Strategies for Compliance: Real-Time Monitoring

One of the best ways to ensure payroll compliance is to leverage restaurant payroll software solutions with built-in guardrails to prevent violations.

Real-time monitoring tools help operators track hours, breaks, and overtime to ensure compliance with labor laws, reducing the need for manual reviews of time sheets. These tools integrate with payroll systems to automate the tracking of overtime and wages, ensuring employees are paid accurately and in full compliance with local, state, and federal regulations.

Additionally, real-time alerts notify operators if employees miss meal breaks, giving them the opportunity to address issues before the end of the shift. Centralized interfaces simplify time and attendance management, allowing managers to compare scheduled versus actual hours, ensuring payroll accuracy and optimal labor utilization.

Download The Definitive Guide to Compliance for Restaurants

Maintaining compliance is a challenge for many restaurant operators. There are numerous regulations to know and violations could threaten the stability of the business. Get informed on the most important labor regulations for restaurants, including time and attendance, recruiting, and employee benefits, in our essential ebook, The Definitive Guide to Compliance for Restaurants.