Overview: Think twice before stiffing wait staff on a tip - chances are they're being paid only $2.13 an hour by their employer. They make a living almost entirely based on tips.
This is because, under minimum wage laws, restaurants, hotels and other employers can apply the tips received by waiters, waitresses, bartenders, bellhops and other employees as a credit against their minimum wage obligations under the Fair Labor Standards Act (FLSA). Here's how it works: as long as the employees receive at least $5.12 in tips for every hour worked, employers need to pay a cash wage of only $2.13 an hour (the two together add up to the federal minimum wage of $7.25 an hour).
Employers that wish to take advantage of this tip credit must consider a variety of compliance challenges. To avoid potential liability, employers must, among other things, properly inform employees about the tip credit; ensure employees retain all their tips; determine the number of hours during which the tip credit may be claimed; properly deduct credit card processing fees; and factor tips into overtime calculations.
Not all states allow tip credits, and those that do often have provisions that differ from the federal requirements. As always, employers must comply with whichever requirement is more favorable to the employee.
Trends: As credit cards, debit cards and other forms of electronic payment are used in more and more transactions, it should become easier for employers to fulfill recordkeeping requirements related to the tip credit. It is common for tipped employees to under-report their tips in an illegal attempt to reduce their tax burden. This is easy to accomplish with cash tips, but much more difficult with tips on credit cards.
Author: Michael Cardman, Legal Editor
Updated to reflect forthcoming increases in the minimum wage.
Updated to reflect an increase in Arkansas's minimum wage, effective January 1, 2017.
Updated to reflect a forthcoming amendment to the tip pools law.
Updated to include a forthcoming amendment regarding the subminimum wage for employees of seasonal amusement and recreational establishments.
Updated to include developments regarding employee retention of tips.
The US Department of Labor set a target date of August 2017 for issuing a Noticed of Proposed Rulemaking (NPRM) to rescind the current Fair Labor Standards Act restrictions on "tip pooling by employers that pay tipped employees the full minimum wage directly."
Updated to include a forthcoming amendment regarding the credit for tipped employees.
HR guidance on complying with the federal and state requirements for the minimum wage tip credit.