Tipped employees largely work in the restaurant, hospitality and service industries and they regularly receive tips in the performance of their jobs. Their employers, however, sometimes find it challenging to ensure they meet minimum wage rate requirements, handle the “tip credit” properly and help tipped workers understand their pay.
The federal Fair Labor Standards Act (FLSA) requires employers to pay employees at least the federal minimum wage rate, currently $7.25 per hour. One exception is the “tip credit”. The tip credit allows employers to pay tipped employees below minimum wage by counting the tips received toward the minimum wage obligation. If an employee’s tips combined with the employer’s cash wage do not equal the minimum hourly wage, the employer must make up the difference.
There are several conditions to the tip credit. For an employer to claim a tip credit, its tipped employees: 1) must regularly receive at least $30 a month in tips, 2) must paid an hourly wage of at least $2.13 per hour, 3) must retain all tips, and 4) must be given actual notice, in advance, of the employer’s use of the tip credit provisions of the FLSA. (29 CFR § 531.59). The notice must include:
- the amount of cash wage the employer is paying a tipped employee, which must be at least $2.13 per hour;
- the additional amount claimed by the employer as a tip credit, which cannot exceed $5.12 (the difference between the minimum required cash wage of $2.13 and the current minimum wage of $7.25);
- that the tip credit claimed by the employer cannot exceed the amount of tips actually received by the tipped employee;
- that all tips received by the tipped employee are to be retained by the employee, except for a valid tip pooling arrangement; and
- that the tip credit will not apply to any tipped employee unless the employee has been informed of these tip credit provisions.
Although notice that the employer intends to use the tip credit may oral or written, a federal court recently ruled that the duty to inform is an affirmative duty placed upon the employer. (Perez v. Lorraine). An employer cannot rely on what employees might infer from pay stubs showing sub-minimum wages or its tip reporting practices to confer the notice. For that reason, employers should consider routinely providing written notice of the intention to take a tip credit at the time of hire and obtaining a signed receipt from each employee that directly receives tips or participates in the tip pool.
Employers should also be aware that state tip credit rules may vary from the federal rule. Where these exist, employers must follow the rule of law that affords employees the greatest protection.