The Tip Credit
Tipped employees, like all other employees, must earn at least the required state or federal minimum wage rate. Usually, a portion of an employee’s tips and cash wages together count toward the minimum wage rate. 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.
Most minimum wage jurisdictions also allow employers to claim a “tip credit.” The “tip credit” is the maximum amount of an employee’s tips that an employer may use to offset its minimum wage obligation. Under federal Fair Labor Standards Act (FLSA), the maximum tip credit an employer can claim is $5.12 per hour. That amount is the difference between the $7.25 per hour federal minimum wage rate and the FLSA’s $2.13 tipped employee minimum cash wage rate. Under current FLSA regulations, an employer is prohibited from using an employee’s tips for any reason other than as a credit against its minimum wage obligation to the employee or in furtherance of a valid “tip pool.”
Under current FLSA regulations, tips are the property of the employee performing the service. This rule does not preclude a valid “tip pooling” or tip sharing arrangement between employees who are customarily or regularly tipped, such as wait staff, bartenders or bellhops, so long as they are properly informed. However, a valid tip pool may not include employees who are not customarily or regularly tipped, such as dishwashers, cooks, chefs and janitors. That restriction is soon expected to change. Last month, the US DOL announced its intention to rescind the current tip-pooling restriction and allow “back of the house” employees to participate in tip pools.
The practice of tip pooling raises issues of fairness and the “full service experience.” Before the current FLSA regulation took effect, the courts were divided on the issue of whether non-tipped employees could participate in tip pooling. Some courts held that the FLSA prohibited tip sharing with non-tipped employees. Other courts decided that employers who do not utilize tip credits could implement tip pooling policies that included non-tipped employees. The current FLSA regulation restricting tip pools to tipped employees, whether or not a tip credit has been taken, was intended to settle the controversy.
The US DOL’s proposed rescission of the current FLSA regulation is good news for hospitality employers trying to compete for top talent who may be attracted by the added incentive. Interestingly, the proposed rule will allow employers to retain a portion of those tips, too. Although the current regulation remains in effect until repealed, the DOL indicated that it would not be enforcing the current regulation in the meantime.