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
In Schaefer v. Walker Bros. Enters., the 7th Circuit Court of Appeals followed federal guidance that allows employers to claim the minimum wage tip credit even when their employees spend as much as 20 percent of their time performing duties that are related to their occupations but do not explicitly produce tips.
Updated to reflect the passage of San Diego's new minimum wage ordinance, effective July 11, 2016.
Updated to reflect a minimum wage increase in Chicago, effective July 1, 2016.
Updated to reflect the establishment of the state's three-region minimum wage, effective July 1, 2016.
HR guidance on complying with the federal and state requirements for the minimum wage tip credit.