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
If enacted, the ballot initiative would gradually increase the minimum direct cash wage for tipped employees in the District of Columbia so that they receive the same minimum wage directly from their employer as non-tipped employees by 2026.
Updated to reflect the forthcoming Redwood minimum wage ordinance.
Updated to reflect information on a state supreme court ruling concerning the provision of health care benefits.
A new regulatory agenda shows the US Department of Labor (DOL) intends to make changes to rules involving child labor, the regular rate of pay, the salary threshold for overtime-exempt employees, the minimum wage tip credit and more.
Updated to reflect changes to the subminimum wage in Seattle, effective May 13, 2018.
Updated to reflect the 2018 annual inflation adjustment to the minimum wage in Portland.
As an enforcement policy, the US Department of Labor (DOL) will use the duties test for executive employees to determine whether an employee is a manager or supervisor.
An amendment to the Fair Labor Standards Act (FLSA) in the omnibus budget bill prohibits employers, including managers or supervisors, from keeping any part of tips received by employees for any purpose, regardless of whether the employer takes a tip credit.
HR guidance on complying with the federal and state requirements for the minimum wage tip credit.