The Fair Labor Standards Act (“FLSA”) allows employers to satisfy up to $5.12 per hour of its minimum wage obligation to tipped employees with tips received by the employees. That means the employer has to pay the employee $2.13 per hour, with the understanding that tips make up the difference. Tips are the property of the employee, and an employer can only take advantage of those tips in satisfying its minimum wage obligation to the employee. Some specific rules are not addressed here.
One important rule is that the employer must provide the following information to a tipped employee before the employer may take advantage of the tip credit:
- The amount of cash wage the employer is paying a tipped employee, which must be at least $2.13 per hour;
- The additional amount claimed by the employer as a tip credit, which cannot exceed $5.12 (the difference between the minimum required cash wage of $2.13 and the current minimum wage of $7.25);
- That the tip credit claimed by the employer cannot exceed the amount of tips actually received by the tipped employee;
- That all tips received by the tipped employee are to be retained by the employee except for a valid tip pooling arrangement limited to employees who customarily and regularly receive tips; and
- That the tip credit will not apply to any tipped employee unless the employee has been informed of these tip credit provisions.
If an employer does not follow the proper procedures under the applicable tip credit regulations (including making the above disclosures), the employer may lose its ability to claim the tip credit. That can expose employers to significant liability in FLSA lawsuits brought by employees.
Common issues that can lead to tip-credit litigation include:
- Where the employer pays the employees on a tip-credit basis of $2.13 per hour plus tips for periods of time that are not predominately tip generating. This includes periods in which more than 20% of the tasks are non-tip generating activities (e.g. cleaning and stocking or any work before opening or after closing).
- Where an employee does not receive sufficient tips to make up the difference between the employer’s wage payment (which must be at least $2.13 per hour) and the minimum wage, the employer must make up the difference.
- Where an employee receives tips only and is paid no cash wage, the full $7.25 minimum wage is owed.
- Where a tipped employee is required to contribute to a tip pool that includes employees who do not customarily and regularly receive tips, the employee is owed all tips he or she contributed to the pool and the full $7.25 minimum wage.