Employment/Tax Law Germany vs. U.S.A.: To tip your server or not?
February 4, 2019
As nearly everyone tends to eat at a restaurant from time to time, tips are something that concern everybody, whether you are the one to give or to receive a tip. However, there are big differences in both countries when it comes to defining the legal nature of tips.
Tipping in Germany
In Germany, tips in the gastronomic sector are actually less of a social requirement than in other countries even if they are common and expected. Germany provides no statutory provisions to regular tips, which is a result of the Preisangabenverordnung (Price Statement Enactment, initially effective since 1970) that stated all labeled prices in Germany have to be final prices, including taxes etc.
The common amount is about 10% of the check, but employees are not entitled to it, whether against the guest, nor the employer (apart from specific exceptional cases). As a result, tips are not part of the employee`s wage and consequently tax free, according to section 3 Nr. 51 EstG (German Personal Income Tax Law). However, the fact that there is no legal title to tips doesn’t change their importance for German employees. Wages in the German gastronomic sector are often quite low, too, just because employers do actually know that tips are common. A limit is set by the Mindestlohngesetz (Minimum Wage Law), which states a minimum wage of 9.19 Euros an hour in 2019. This wage must be paid by the employer, regardless of whether and how much tips the employee receives.
As a result, in theory, prices in restaurants factor in the service, so that additional tips are socially expected, but not mandatory. However, the part for service is never a tip, even if it is itemized, so the tax-free rule of section 3 Nr. 51 EstG is not applicable. Because of this, employees are absolutely free to enter into an agreement of tip pooling or sharing, of course limited by abuse of law and the fact that tips are little money gifts to the employee, not the employer.
Tipping in the U.S.
By contrast, in the U.S., tips are a part of the employee’s wage, and it is seen as an absolute faux-pas not to tip at all. Generally, the amount should be at least around 15-20 % of the check. Employees often rely on tips, because wages in the U.S. gastronomic sector are often only minimum wage. Tips are property of the employee, but in some states, there is actually a possibility how employers can include tips up to a predetermined limit to the paid wages. Generally, there is a Federal minimum wage of $7.25, but lots of states do have additional laws. In some states, employers may pay their employees as little as $2.13 and give them a “tip credit”, which means that the employee gets only the $2.13 minimum as a direct wage from the employer, and the remaining amount has to be added through tips.
There is a great diversity of state laws concerning tips, so employer always need to be well informed. For example, in some states, employers using a tip credit must be aware that they will have to make up the difference if the tips are not enough to reach the minimum wage. Additionally, the direct wage of at least $2.13 is absolutely mandatory, and without it, a tip credit agreement is invalid. The employee may otherwise be entitled to the full minimum wage of $7.25 plus tips.
Due to the fact that tips are part of an employee’s wage and property of the employee, tips generally need to be taxed. The Federal Fair Labor Standards Act also prohibits employers from becoming owner of the tips, but in many states, employees are free to agree into tip pooling or sharing arrangements, as long as those pools are limited to employees who customarily and regularly receive tips. However, requirements vary from state to state again and employers should always check with the state-specific regulations.
In conclusion, the legal differences in both countries are remarkable, and employers -as well as employees- should always be aware of local laws and regulations and their legal consequences in order to avoid invalid arrangements and legal conflicts.
References:
https://www.dol.gov/whd/regs/compliance/whdfs15.htm
https://www.arbeitsrechte.de/trinkgeld/
Best regards
und viele Grüße aus Charlotte
Reinhard von Hennigs
www.bridgehouse.law
und viele Grüße aus Charlotte
Reinhard von Hennigs
www.bridgehouse.law