HR Management & Compliance

Minimum Wage Requirements for Tipped Employees and Piece Rates

In this article series, we provide a refresher on the basics of the Fair Labor Standard Act’s (FLSA’s) requirements.  In our previous article, we explained FLSA’s minimum wage provisions and a few exemptions. In this article, we discuss how they apply to tipped employees and piece-rate workers.

Tipped Employees

There is a limited exception to the minimum wage requirements for tipped employees. Workers who regularly receive more than $30 a month in tips are considered “tipped employees.” Employers may claim a tip credit against their minimum-wage obligations to such employees, so long as they pay the tipped employees a cash wage of at least $2.13 an hour.

Employers should require tipped employees to carefully record and report all tips received each pay period. If an employee’s tips and cash wages together don’t equal at least the minimum wage for all hours worked, the employer must make up the difference.

Employers may apply the tip credit only to those hours during which an employee performed work as a “tipped employee.” For example, if tipped employees are required to attend training sessions before beginning their work as servers, the tip credit may be applied only to the hours worked as servers, not to the time spent in training sessions.

An employer that elects to use the tip credit provision must give employees notice in advance. The notice must include the following information:

  • The amount of the cash wage the employee will receive
  • The additional amount the employer is using as a tip credit
  • A statement that the tip credit amount cannot exceed the value of tips actually received by the employee
  • A statement that all tips received by the employee must be kept by the employee except for valid tip pools
  • A statement that the tip credit does not apply to any employee who has not received advance notice of the tip credit provisions

Applicable law: See 29 U.S.C. § 203 (m) and (t); 29 C.F.R. § 532.52.

Piece Rates

An employee working on a piece-rate basis (paid based on rate of production rather than time worked) must earn at least the minimum wage. Examples of piece-rate work include:

  • Servers employed by a catering service who are paid a flat rate per event;
  • Transcriptionists employed by a hospital who are paid according to the number of lines transcribed;
  • Garment workers paid according to the number of garments completed.

To determine whether a piece-rate worker is receiving at least minimum wage, divide the employee’s total earnings for the workweek by the number of hours worked that week. If the rate is less than the legal minimum, you must make up the difference. In other words, each pay period, you must pay the employee either his actual piece-rate earnings or the minimum wage, whichever is greater.

Caution: Employers sometimes assume that if they are not paying an employee on an hourly basis, it is not necessary to keep time records. However, it is crucial for you to keep accurate time records for all nonexempt employees, regardless of whether you are paying them on an hourly basis. Not only is such record keeping expressly required by the FLSA, it is the only way for you to make sure (and later prove to an auditor) that you have been paying employees at least minimum wage, plus any required overtime pay.

 In our next article, we’ll discuss how minimum wage provisions apply to employees paid on a commission basis and payroll deductions.

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