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How Does A Tip Credit Work?

by | Apr 21, 2022 | Employment Law, Wage: Minimum Wage, Wage: Overtime, Wage: Tipped Employees |

Before understanding the ins and outs of tip credits and pay violations for tipped-wage employees, lets start with the basics. The Fair Labor Standards Act (“FLSA”) requires employers to pay employees a minimum wage for all work performed in a workweek. 29 U.S.C. § 206(a)(1). (Best Law Read: Ohio’s New Minimum Wage Law: What Does It Mean for Me?). Because most employees receive direct pay only from their employers, calculating minimum wage is straight forward process – just divide the weekly pay by the hours worked in that given workweek. However, because tipped employees receive pay from both the employer and tipping customers or restaurant guests, the calculation is more complex.

Do I qualify as a tipped employee?

Best Wage And Hour Attorney Answer: The FLSA at 29 U.S.C.A. § 203(t) provides: “‘Tipped employee’ means any employee engaged in an occupation in which he customarily and regularly receives more than $30 a month in tips.” Because of this low threshold, there is a good chance that if you get tips as part of your job, you will be considered a tipped employee.

What are examples of tipped employees?

Top Employment Law Answer: The most common tipped employee positions include waiter (waitress, server), bartender, hairstylist (barber), manicurist, beautician, masseuse, valet, casino dealer or host, food delivery driver, taxi driver, room service staff, dog walker, dog groomer, golf caddy, doorman, tour guide, ski instructor, cleaning staff, mover, nanny (babysitter), concierge, and exotic dancer.

What is a tip credit?

Top FLSA Lawyer Answer: A tip credit is the amount that an employer can use to offset payments to tipped employees against the FLSA minimum wage requirements. While the current federal minimum wage (2022) is $7.25 per hour, the FLSA allows employers to pay tipped employees as low as $2.13 per hour. See 29 U.S.C. § 203(m). The FLSA still requires tipped employees to receive at least the full minimum wage, but their employers are permitted to pay a direct wage of $2.13 per hour and then take a ‘tip credit’ to meet the $7.25 per hour minimum wage requirement. Stated another way, an employer will be in compliance with FLSA minimum wage requirements if the company pays its tipped workers at least $2.13 per hour, and that wage when combined with the tips earned by the employees equal at least the $7.25 per hour minimum wage.

How do I calculate a tip credit?

Ohio FLSA Lawyer Answer: This can be incredibly complicated, which is why anyone questioning whether their boss is properly using a tip credit should contact a wage and hour attorney. On a per hour basis, if an employee has received more than an average of $5.12 in tips, the employer can take a maximum of $5.12 per hour as a credit.

Can my job automatically use a tip credit without telling me?

Best Ohio Pay Violation Attorney Answer: No. The FLSA contains very strict requirements, two of which are that the employer must inform a tipped employee that the tip credit was being claimed; and that the employees must be allowed to retain all of the tips. See 29 U.S.C. § 203(m). In Richard v. Marriott Corp., 549 F.2d 303, 305 (4th Cir.1977), the Fourth District Court of Appeals explained the strictness of this requirement: “What the Congress has said, in effect, to restaurant employers is that, if you precisely follow the language of 3(m) and fully inform your employees of it, you may obtain a … credit from the receipt of tips toward your obligation to pay the minimum wage. The corollary seems obvious and unavoidable: if the employer does not follow the command of the statute, he gets no credit.”

Can my job keep part of my tips and still pay me less than the full minimum wage?

Top Wage Theft Lawyer Answer: No. Another strict FLSA requirement is that in order for an employer to use the tip credit, the employer must allow the employee to retain all tips earned by that employee (individually or as part of a tip pool). See 29 U.S.C. § 203(m). Employers cannot participate in tip pools. The FLSA defines an “employer” as “any person acting directly or indirectly in the interest of an employer in relation to an employee.” See 29 U.S.C. § 203(d).

“Congress, in crafting the tip credit provision of section 3(m) of the FLSA did not create a middle ground allowing an employer both to take the tip credit and share employees’ tips.” Gionfriddo v. Jason Zink, LLC, 769 F.Supp.2d 880, 893 (D.Md.2011). To that end, a business cannot take the tip credit if the employer exercises control over a portion of the employee’s tips. For example, in Bernal v. Vankar Enters., Inc., 579 F.Supp.2d 804, 810 (W.D.Tex.2008), the court held that “[t]o the extent Plaintiffs were not permitted to retain their tips to pay for shortages and unpaid tabs, Defendants disqualified themselves from taking advantage of the FLSA tip credit provisions. Defendants were therefore not entitled to take tip credits.”

What happens if my boss does not comply with the tip credit requirements?

Best Wage Lawyer Answer: The employer loses the benefit of the tip credit and must pay the employee the full minimum wage. Depending on the culpability of the employer, courts will provide two to three years of back wages and an equal amount in what is called liquidated damages. Essentially, an employer’s violation of the tip credit requirements will result in the employer paying the employee double the amount of the tip credit improperly taken by the employer. (Best Law Read: What Damages Can I Get For Wage Violations And Retaliation Under FLSA?). However, an employer can assert an affirmative defense to the liquidated damages by showing that it acted in good faith, which is a hard burden for employers to prove in practice.

How is overtime pay calculated for tipped employees?

Best Overtime Wage Lawyer Answer: The overtime rate for when tipped employees work more than 40 hours in a given workweek is one and half time the highest required minimum wage (whether federal or state) less the maximum allowed tip credit, which remains no more than a maximum of $5.12 per hour as a credit. So, for example, let’s assume that a tipped employee is making more than $5.12 in tips per hour and working in a state with the same minimum wage as the federal requirement (states cannot have a lower minimum wage than the federal requirement). In that case, the employee’s wage would be calculated like this: $7.25 (federal minimum wage) x 1.5 (FLSA overtime multiplier) – $4.25 (tip credit) = $6.62 (overtime wage per hour). Of course, the tipped employee would also keep all earned tips. However, in Ohio, for example, the calculation would look like this. $9.30 (Ohio’s minimum wage) x 1.5 (FLSA overtime multiplier) – $4.25 (tip credit) = $9.70. (Best Law Read: Overtime: Is Your Employer Paying You The Right Overtime Rate?; I Want To Keep Getting Paid In Tips, But Am I Still Entitled To Overtime? I Need The Top Wage And Overtime Attorneys In Ohio!).

 

What should I do if my job is not paying me right?

Best Tipped Employee Rights Lawyer Answer: Waiters, waitresses, servers, bartenders, valets and other tipped employees depends on tips to live. If you are a tipped employee and believe that your employer is not paying you all of your wages for all of your lawfully earned time or taking part of your tips or participating in the tip pool as prohibited under the Federal Fair Labor Standards Act (FLSA) or Ohio Fair Labor Standards Act, contact the attorneys at Spitz, The Employee’s Law Firm today. (Best Law Read: How Do You Recover Stolen Wages?). Our FLSA attorneys will provide you with a completely free and confidential initial consultation. (Read: What is the Spitz No Fee Guarantee?) The wage and hour lawyers at Spitz will provide you with the best options for your overtime, minimum wage and other pay dispute situations. If you even think that you may be entitled to overtime pay that you are not being paid, it is best to call our top wage lawyers now.

Disclaimer:

The materials available at the top of this tipped wage violation, wage and hour web page and at this employment law website are for informational purposes only and not for the purpose of providing legal advice. If you are still asking, “What is a tip credit?”, “How does a tip credit work?”, “Can tipped employees be paid less than minimum wage” or “What do I do if my boss refuses to pay the overtime premium?”, the your best option is to contact an Ohio wage attorney to obtain advice with respect to FLSA questions or any particular employment law issue. Use and access to this employment law website or any of the links contained within the site do not create an attorney-client relationship. The legal opinions expressed at the top of this page or through this site are the opinions of the individual lawyer and may not reflect the opinions of The Spitz Law Firm, Brian Spitz, or any individual attorney.