Jesse Seager was mortified when an audit by the U.S. Department of Labor found the system his restaurants had for sharing tips was not in compliance with federal law.

Seager said he was trying to do what was fair for all of the employees at his two Pittsburgh restaurants, where tips are collected by the restaurant and credited to the appropriate employees. Then the tips would be distributed in paychecks to the individual servers, with a percentage pulled out to be given to the bartenders, hostesses and dishwashers.

The Department of Labor, it turns out, has rules about how restaurants can structure tip sharing and what those businesses can demand of their employees’ tips.

Federal minimum wage is $7.25 per hour for the first 40 hours in a week. However, the law allows employers to pay employees who also receive tips less than the standard minimum wage. In Pennsylvania, that would be $2.83 an hour.

Here’s the caveat: If you pay an employee less than the federal minimum wage, then you can’t take back the money they make in tips. That money is theirs.

It is not to be used to cover shortages in the register, broken plates, the cost of uniforms or even for corkscrews. Those costs are the costs of doing business and they are to be placed on the restaurant ownership, not the wait staff.

While Seager’s restaurants violated the rules on the register shortages a handful of times over a two-year period, it was the pooling of tips that was the big problem – and it’s why he had to pay out $37,719 to 39 employees.

The Department of Labor announced in November that he had paid the entire amount in full.

Because the restaurants are small, Seager said, they don’t have dedicated staff members to bus the tables. Instead, all staff members chip in, with dishwashers stepping in to carry the bus tubs and even clearing tables when needed. Hostesses were pitching in, too, fetching water and tableware and clearing dishes when diners were done.

In Seager’s payroll system, tips were included in paychecks so that the correct amount would be included for income and Social Security taxes.

The system worked out in some ways, he said, because when the auditor from the Department of Labor showed up, all of the information she needed was readily available.

That’s how she came to the conclusion that he needed to pay back his employees $37,719, which he did right away.

“It hurt,” he said of the payment. “We had what we thought was a fair divvying up to the dishwashers.”

Seager’s restaurants were never fined.

Brian Heeter, the assistant director in the Pittsburgh office of the Wage and Hour Division of the U.S. Department of Labor, said Seager was cooperative and complied with the rules.

Heeter said the rules allow an employer to mandate that employees pool tips for people who work on the floor with customers.