Business owners in California and across the U.S. are facing a new wave of legal changes impacting how they handle employee compensation, especially around tips and overtime. The OBBB—short for the latest “Overtime, Breaks, and Business Benefits” legislation—marks a significant shift in employer obligations. Understanding how this law affects your payroll, tax compliance, and bottom line is crucial for staying compliant and avoiding costly penalties.
At The Law Office of Pietro Canestrelli, A.P.C., we help business owners in Temecula, San Diego, Riverside, San Bernardino, and throughout Southern California navigate complex employment and tax laws. In this guide, we break down what you need to know about the OBBB, how it affects tips and overtime, and the steps you can take to protect your business.
What Is the OBBB?
The OBBB is a set of employment law regulations targeting wage and hour issues, specifically overtime pay, employee tips, break requirements, and employer recordkeeping. While details vary by jurisdiction, the law’s intent is to increase transparency, fairness, and compliance in how businesses compensate workers—especially in industries like hospitality, retail, and services.
- Overtime Calculation Changes: Employers must pay overtime based on the “regular rate” of pay, which now often includes non-discretionary bonuses, shift differentials, and sometimes even certain types of tips.
- Tip Pooling and Reporting: Stricter requirements on how tips are pooled and reported, with penalties for improper distribution or withholding.
- Recordkeeping: Enhanced documentation rules for all payroll, overtime, and tip transactions.
- Penalties: Increased fines for non-compliance, including tax penalties if tips and overtime aren’t properly reported to the IRS.
How Does OBBB Affect Tips for Business Owners?
1. Tip Pooling Rules
The OBBB clarifies and sometimes restricts how employers can manage tip pooling. For example, California law already prohibits owners, managers, and supervisors from taking part in tip pools. The OBBB may reinforce or expand these rules, so that only employees who “customarily and regularly” receive tips (like servers, bartenders, or bussers) can participate.
Takeaway: Review your business’s tip pooling policies and ensure managers or owners are not included. Improper pooling can lead to wage claims, IRS scrutiny, and penalties.
2. Tip Reporting to the IRS
Tips are taxable income and must be reported accurately. Under OBBB, there is a renewed emphasis on proper tip tracking and reporting, both for payroll purposes and for compliance with federal and state tax laws. The IRS requires employers to report tips and withhold the proper payroll taxes. The OBBB may require employers to use specific payroll software or methods to ensure tips are properly tracked.
- Ensure employees report all tips received.
- Accurately withhold Social Security, Medicare, and income taxes from tips.
- File required IRS forms, such as Form 8027 for large food and beverage establishments.
For guidance on IRS requirements and audits, see our IRS Audit page.
Overtime: What’s Changed Under OBBB?
1. Calculating Overtime
One of the most impactful OBBB changes is how overtime is calculated. Overtime is now based on the regular rate of pay, which may include:
- Hourly wages
- Non-discretionary bonuses
- Commissions
- Certain tips (if not fully distributed to employees)
- Shift differentials
This means bonuses or incentive pay, which used to be considered separate, now increase the employee’s overtime rate. Failing to include these in calculations can lead to back wage claims or lawsuits.
Example:
If an employee earns $15/hr and a $100 non-discretionary bonus in a week where overtime is worked, the bonus must be factored into the “regular rate” before calculating time-and-a-half.
2. Overtime for Tipped Employees
If your business uses a tip credit (less common in California but used in some other states), the OBBB may affect how you calculate the overtime rate for tipped employees. In California, employers cannot take a tip credit, but OBBB changes still require accurate reporting and payment of overtime on total earnings—including any mandatory service charges or bonuses.
Breaks, Rest Periods, and Recordkeeping
The OBBB generally increases employer responsibility for providing meal and rest breaks. Failing to provide required breaks or not documenting them correctly can lead to automatic penalty pay (often one hour’s wage for each missed break). Employers must also keep detailed, contemporaneous records for:
- Hours worked
- Overtime
- Tips reported and distributed
- Breaks provided
If you’re unsure how to implement these processes, our Business Planning team can help you set up compliant payroll systems.
The Tax Impact: Payroll and Reporting Considerations
Why does this matter for taxes?
Improperly reported tips or overtime not only violate labor laws—they can trigger IRS audits and costly back taxes. California and federal agencies share information, and an employment law claim can quickly become a tax controversy.
- Payroll Taxes: Tips are subject to employer payroll tax just like regular wages.
- Employee Classification: Misclassifying workers as independent contractors or “managers” to avoid overtime is a common audit trigger.
For information on dealing with IRS issues, see Back Tax Representation and Tax Relief.
FAQs: OBBB, Tips & Overtime for Business Owners
Q: Does the OBBB change minimum wage or just overtime rules?
A: The OBBB focuses on overtime, tips, and breaks but may interact with state/local minimum wage laws.
Q: What if my business operates in multiple states?
A: You must comply with both OBBB rules and the strictest applicable state laws (California’s are often stricter).
Q: Are tips counted towards overtime in California?
A: Direct cash tips are not included in overtime calculations, but mandatory service charges, bonuses, and some incentive pay now are.
Q: How do I protect my business from lawsuits?
A: Conduct a wage and hour audit, review your tip pooling and overtime policies, and consult a knowledgeable business attorney.
Steps to Protect Your Business
- Review All Compensation Policies: Ensure compliance with OBBB and California labor law.
- Upgrade Payroll Systems: Use software capable of detailed tip, wage, and overtime tracking.
- Train Your Managers: On break requirements, overtime calculations, and tip reporting.
- Consult a Tax Attorney: To ensure you’re meeting IRS requirements and minimizing risk.
For a comprehensive business law review, visit our Business Formation or Tax Law pages.
Conclusion
Staying ahead of OBBB compliance is essential for any business owner in California or across the U.S. The new rules on tips, overtime, and recordkeeping can expose your business to wage claims, IRS audits, and costly penalties if not managed correctly. At The Law Office of Pietro Canestrelli, A.P.C., our experienced tax and business attorneys are here to guide you through every step—from payroll setup to audit defense.
Contact us today for a confidential consultation and protect your business from costly legal and tax mistakes.
