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 restaurants, hotels and other employers can apply the tips received by wait staff, bartenders, bellhops and other employees as a credit against their minimum wage obligations under the Fair Labor Standards Act (FLSA) and many state minimum wage laws. For example, at the federal level, as long as employees receive at least $5.12 in tips for every hour worked, employers need to pay a direct 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
Enhanced to improve comprehensiveness with additional details about the tip credit.
Updated to reflect the 2019 annual inflation adjustment to the maximum deductions for board and lodging.
Updated to reflect passage of the minimum wage ordinance in St. Paul.
Updated to reflect the expiration of amendments expanding voluntary wage deductions, effective November 6, 2018.
The US Department of Labor (DOL) will not limit the amount of duties related to a tip-producing occupation - such as washing dishes or making coffee - that may be performed, as long as they are performed contemporaneously with direct customer-service duties and all other requirements of the Fair Labor Standards Act (FLSA) are met.
Updated to reflect information on a US Department of Labor opinion letter regarding the tip credit for employees who perform dual jobs / sidework.
HR guidance on complying with the federal and state requirements for the minimum wage tip credit.