Author: Sandra Perry
As a service of the Bose McKinney & Evans Hospitality Group, below is information employers may find helpful to remain compliant with the laws regarding tip credit and tip pools.
Tip Credit: The federal Fair Labor Standards Act (FLSA) allows an employer to pay a tipped employee an hourly wage that is less than the legal minimum wage provided the employer satisfies certain payment and notification requirements.
Payment: The tipped employee’s tips plus the hourly wage paid by the employer must equal at least the legal minimum wage (currently $7.25 per hour). The difference between the employee’s hourly wage and the legal minimum wage is called a tip credit.
The minimum hourly wage an employer may pay to a tipped employee is $2.13 per hour. This results in a maximum tip credit available to the employer of $5.12 per hour (i.e., $7.25 per hour (legal minimum wage) minus $2.13 per hour (minimum-allowed hourly wage), equals a $5.12 per hour maximum tip credit).
Notification: In order to be able to take the tip credit, the employer must notify its tipped employees that it intends to use a tip credit and provide them with the following information:
• The amount of cash wage the employer will pay the employee
• The amount the employer will credit against tips received
• That the tip credit cannot be greater than the value of tips the employee actually receives
• That the tip credit cannot be applied unless the tipped employee has been informed of the tip credit provisions of the FLSA
• That, except for valid tip pooling, all tips received by the tipped employee must be retained by the employee
Tip Pool: Tips are considered the sole property of the tipped employee even if the employer does not take a tip credit (except for in the 9th Circuit). However, the requirement that tips are the property of the tipped employee does not prohibit a valid tip pooling (i.e., sharing) arrangement among employees who customarily and regularly receive tips. However, (1) the employer must notify tipped employees of their required tip pool contribution amount (note: the law does not impose a maximum contribution or percentage amount to the tip pool); (2) the employer may only take a tip credit for the amount of tips each tipped employee actually receives; and (3) the employer may not retain any of the employees’ tips for any purpose.
Common Mistakes Made By Employers:
• Employee receives insufficient tips to make up the difference between the hourly wage payment and minimum wage. The employer must pay the difference.
• An employee receives only tips and no cash wage. The full minimum wage is owed.
• The employer includes in the tip pool employees who do not customarily and regularly receive tips (e.g., cooks, dishwashers etc.).
• Deductions for such as breakages or shortages reduce the employee’s wages below the required minimum wage. Such deductions are also unlawful under Indiana law.
• Miscalculating overtime. Overtime must be calculated on the full minimum wage not the hourly cash wage. Further, overtime must be calculated based on the employee’s regular rate of pay, which includes service charges, commissions, and non-discretionary bonuses, etc.
If you have further questions about tip credit and tip pools and their application to your business, please contact the author of this update, Sandra Perry, or your Bose McKinney & Evans attorney. Learn more about the Bose McKinney & Evans Hospitality Group.
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