Tips

Scope

The 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 (“tip credit”) or in furtherance of a valid tip pool. Only tips actually received by the employee may be counted in determining whether the employee is a tipped employee and in applying the tip credit.

Regulatory citations

• None

Key definitions

• Tip credit: Section 3(m) of the Fair Labor Standards Act (FLSA) permits an employer to take a tip credit toward its minimum wage obligation for tipped employees equal to the difference between the required cash wage (which must be at least $2.13) and the federal minimum wage. Thus, the maximum tip credit that an employer can currently claim under the FLSA is $5.12 per hour (the minimum wage of $7.25 minus the minimum required cash wage of $2.13).
• Tip pool: The requirement that an employee must retain all tips does not preclude a valid tip pooling or sharing arrangement among employees who customarily and regularly receive tips, such as waiters, waitresses, bellhops, counter personnel (who serve customers), bussers, and service bartenders. A valid tip pool may not include employees who do not customarily and regularly received tips, such as dishwashers, cooks, chefs, and janitors.

Summary of requirements

Tip credit limits. The Department of Labor (DOL) has indicated (and some courts have agreed) that a tipped employee must receive the full minimum wage (no tip credit allowed) for time spent performing work that does not produce tips, if such time constitutes more than 20 percent of the workweek. For example, if an employee working 40 hours per week spends 30 hours serving customers and another 10 hours (or 25 percent of the working time) washing dishes, no tip credit may be taken for the time spent washing dishes; the full minimum wage must be paid for those 10 hours.

State minimum wages may be higher than the federal rate, or states may limit the amount of tip credit that may be taken. Some states do not allow any tip credit at all.

Tip pool. Some courts have held that a tip pool may include non-tipped employees (such as dishwashers) as long as the employer is not taking a tip credit against the minimum wage. However, employers should consult legal counsel before implementing a pool that includes non-tipped employees. The Department of Labor has issued regulations that do not provide for including non-tipped employees in a pool.

Employee information. The employer must provide the following information to a tipped employee before the employer may use the tip credit:

1. The amount of cash wage the employer is paying a tipped employee, which must be at least $2.13 per hour;
2. 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);
3. The tip credit claimed by the employer cannot exceed the amount of tips actually received by the tipped employee;
4. All tips received by the tipped employee are to be retained by the employee except for a valid tip pooling arrangement limited to employees who customarily and regularly receive tips; and
5. The tip credit will not apply to any tipped employee unless the employee has been informed of these tip credit provisions.

The employer may provide oral or written notice to its tipped employees informing them of items 1-5 above. An employer who fails to provide the required information cannot use the tip credit provisions and therefore must pay the tipped employee at least $7.25 per hour in wages and allow the tipped employee to keep all tips received.

Employers electing to use the tip credit provision must be able to show that tipped employees receive at least the minimum wage when direct (or cash) wages and the tip credit amount are combined. If an employee’s tips combined with the employer’s direct (or cash) wages of at least $2.13 per hour do not equal the minimum hourly wage of $7.25 per hour, the employer must make up the difference.

Retention of tips. A tip is the sole property of the tipped employee regardless of whether the employer takes a tip credit. The FLSA prohibits any arrangement between the employer and the tipped employee whereby any part of the tip received becomes the property of the employer. For example, even where a tipped employee receives at least $7.25 per hour in wages directly from the employer, the employee may not be required to turn over any tips to the employer.

Tip pooling. As noted above, the requirement that an employee must retain all tips does not preclude a valid tip pooling or sharing arrangement among employees who customarily and regularly receive tips. The FLSA does not impose a maximum contribution amount or percentage on valid mandatory tip pools. The employer, however, must notify tipped employees of any required tip pool contribution amount, may only take a tip credit for the amount of tips each tipped employee ultimately receives, and may not retain any of the employees’ tips for any other purpose.

Dual jobs. When an employee is employed by one employer in both a tipped and a non-tipped occupation, such as an employee employed both as a maintenance person and a waitperson, the tip credit is available only for the hours spent by the employee in the tipped occupation. The FLSA permits an employer to take the tip credit for some time that the tipped employee spends in duties related to the tipped occupation, even though such duties are not by themselves directed toward producing tips.

For example, a waitperson who spends some time cleaning and setting tables, making coffee, and occasionally washing dishes or glasses is considered to be engaged in a tipped occupation even though these duties are not tip producing. However, where a tipped employee spends a substantial amount of time (in excess of 20 percent in the workweek) performing related duties, no tip credit may be taken for the time spent in such duties.

Service charges. A compulsory charge for service, for example, 15 percent of the bill, is not a tip. Such charges are part of the employer’s gross receipts. Sums distributed to employees from service charges cannot be counted as tips received, but may be used to satisfy the employer’s minimum wage and overtime obligations under the FLSA. If an employee receives tips in addition to the compulsory service charge, those tips may be considered in determining whether the employee is a tipped employee and in the application of the tip credit.

Credit cards. Where tips are charged on a credit card and the employer must pay the credit card company a percentage on each sale, the employer may pay the employee the tip, less that percentage. For example, where a credit card company charges an employer 3 percent on all sales charged to its credit service, the employer may pay the tipped employee 97 percent of the tips without violating the FLSA. However, this charge on the tip may not reduce the employee’s wage below the required minimum wage. The amount due to 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. Some of the most common problems that occur with employers considering employees as a tipped employee are:

Minimum wage problems

• Where an employee does not receive sufficient tips to make up the difference between the direct (or cash) wage payment (which must be at least $2.13 per hour) and the minimum wage, the employer must make up the difference.
• Where an employee receives tips only and is paid no cash wage, the full minimum wage is owed.
• Where deductions for walk-outs, breakage, or cash register shortages reduce the employee’s wages below the minimum wage, such deductions are illegal. Where a tipped employee is paid $2.13 per hour in direct (or cash) wages and the employer claims the maximum tip credit of $5.12 per hour, no such deductions can be made without reducing the employee below the minimum wage (even where the employee receives more than $5.12 per hour in tips).
• Where a tipped employee is required to contribute to a tip pool that includes employees who do not customarily and regularly receive tips, the employee is owed all tips that the employee contributed to the pool and the full $7.25 minimum wage. Some courts have disagreed with this provision, as noted above, but this is the Department of Labor’s enforcement policy.

Overtime problems

• Where the employer takes the tip credit, overtime is calculated on the full minimum wage, not the lower direct (or cash) wage payment. The employer may not take a larger tip credit for an overtime hour than for a straight time hour (i.e., $4.00 tip credit per hour for the non-overtime hours and $5.12 tip credit per hour for overtime hours).
• Where overtime is not paid based on the regular rate including all service charges, commissions, bonuses, and other remuneration.