Special rules apply to employees employed as “tipped employees.” A “tipped employee” is a person who works in a job in which tips are customarily received and regularly receives more than $30 a month in tips. Tips actually received by tipped employees may be counted as wages for purposes of the FLSA, but the employer must pay not less than $2.13 an hour in direct wages.
If an employer elects to use the tip credit provision the employer must:
- Inform each tipped employee about the tip credit allowance (including amount to be credited) before the credit is utilized;
- Be able to show that the employee receives at least the minimum wage when direct wages and the tip credit allowance are combined;
- Allow the tipped employee to retain all tips, whether or not the employer elects to take a tip credit for tips received, except to the extent the employee participates in a valid tip pooling arrangement.
If an employee's tips combined with the employer's direct wages of at least $2.13 an hour do not equal the minimum hourly wage -- $5.15 an hour effective 9/1/97 -- the employer must make up the difference.
*** Important Note*** Many state laws have tip credit laws that are stricter than the federal FLSA. For example, the State of Illinois requires employers to pay 60% of the applicable minimum wage. Effective July 1, 2009, the tip credit rate in Illinois is at least $4.80 per hour. Effective July 1, 2010, the tip credit rate in Illinois is at least $4.95 per hour.
Dual Jobs: When an employee is employed concurrently in both a tipped and a non-tipped occupation, the tip credit is available only for the hours spent in the tipped occupation. The Act permits an employer to take the tip credit for time spent in duties related to the tipped occupation, even though such duties are not by themselves directed toward producing tips, provided such duties are incidental to the regular duties and are generally assigned to such occupations. Where tipped employees are routinely assigned to maintenance, or where tipped employees spend a substantial amount of time (in excess of 20 percent) performing general preparation work or maintenance, no tip credit may be taken for the time spent in such duties.
Retention of Tips: The law forbids any arrangement between the employer and the tipped employee whereby any part of the tip received becomes the property of the employer. A tip is the sole property of the tipped employee. Where an employer does not strictly observe the tip credit provisions of the Act, no tip credit may be claimed and the employees are entitled to receive the full cash minimum wage, in addition to retaining tips they may\should have received.
Service Charges: A compulsory service charge, for example, 15 percent of the bill, is not a tip. Such charges are part of the employer's gross receipts. Where service charges are imposed and the employee receives no tips, the employer must pay the entire minimum wage and overtime required by the Act.
Tip Pooling: The requirement that an employee must retain all tips allows tip splitting or pooling arrangements among employees who customarily and regularly receive tips, such as waiters, waitresses, bellhops, counter personnel (who serve customers), busboys/girls and service bartenders. Tipped employees may not be required to share their tips with employees who have not customarily and regularly participated in tip pooling arrangements, such as dishwashers, cooks, chefs, and janitors. Only those tips that are in excess of tips used for the tip credit may be taken for a pool. Tipped employees cannot be required to contribute a greater percentage of their tips than is customary and reasonable.
Credit Cards: Where tips are charged on a credit card and the employer must pay the credit card company a percentage on each sale, then the employer may pay the employee the tip, less that percentage. This charge on the tip may not reduce the employee's wage below the required minimum wage. The amount due the employee must be paid no later than the regular pay day and may not be held while the employer is awaiting reimbursement from the credit card company.
Typical Problems
Minimum Wage Problems: Employee does not qualify as a "tipped employee", tips are not sufficient to make up difference between employer's direct wage obligation and the minimum wage; employee receives tips only -- so the full minimum wage is owed; illegal deductions for walk-outs, breakages and cash register shortages; and invalid tip pools.
Overtime Problems: Failure to pay overtime on the full minimum wage; failure to pay overtime on the regular rate including all service charges, commissions, bonuses and other remuneration. Employers frequently calculate the overtime rate of pay for tipped employees at an incorrect rate. Set forth below is a common error made in calculating overtime pay.
Servers at a restaurant worked more than 40 hours per week. This restaurant follows federal wage law and pays its tipped servers a cash wage of $2.13 per hour, taking the maximum "tip credit" of $3.02 per hour allowed under federal law.
During a single work week, one server worked 60 hours. In addition to the tips paid directly to him by guests, the server received a total of $149.20 in compensation from the restaurant.
The restaurant computed his wages as follows: 40 hours x $2.13 per hour = $85.20; 20 overtime hours x $3.20 per hour ($2.13 x 1.5) = $64; $85.20 + $64 = $149.20. The server objected and claimed that his compensation was not properly computed. For the reasons set forth below, the server is correct and was unlawfully not paid all the compensation that he was owed.
Employers of tipped employees must pay a cash wage of at least $2.13 per hour if they claim a tip credit against minimum-wage obligations. However, while a restaurant operator can pay $2.13 an hour for the server's first 40 hours worked per week, overtime cannot be calculated at one-and-a-half times $2.13.
In calculating the overtime rate for the tipped employee, the restaurateur must multiply the minimum wage ($5.15 per hour) by 1 ½ (1.5), subtract the tip credit ($3.02 per hour), multiply that figure by the number of overtime hours worked (20 hours), and then add that sum to his 40-hour total ($85.20). [$5.15 x 1.5 = $7.73; $7.73 - $3.02 = $4.71; $4.71 x 20 = $94.20; $94.20 + $85.20 = $179.40.] Therefore, the restaurant should have paid the server $179.40 instead of $149.20.
Illustration: The Correct Calculation |
Employee's regular rate of pay
|
$5.15 |
Multiply by overtime rate
|
x 1.5 |
|
= $7.73 |
Subtract the federal tip credit |
- $3.02 |
Equals overtime rate |
= $4.71 |
Multiply by the number of overtime hours worked (20 hours) |
x 20 |
Total overtime pay
|
= $94.20 |
Employee's pay for first 40 (straight-time) hours:
40 hours x $2.13 per hour
|
+ $85.20 |
Employee's total weekly pay
|
= $179.40 |
Failing to include the value of meals in the overtime rate. If an employer provides meals to employees and does not qualify for a meal credit, the employer must include the value of those meals as part of an employee's total remuneration when calculating the employee's regular rate of pay. However, DOL regulations do permit an employer to enter into an agreement with any or all of his employees to exclude the cost of a "free daily lunch or other single daily meal furnished to employees" when computing overtime rates. For the meal to be excluded from overtime rates in those instances, the meal must be provided at no cost to the employees, the employer may not take a meal credit, and both the employer and employee must agree to this arrangement before the meals are furnished.
Questions? Contact a tip credit lawyer at Werman Law Office, P.C.
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