The U.S. Department of Labor (DOL) continues to devote substantial resources to investigating certain low-wage industries each year. Among those regularly targeted are fast-food establishments and other restaurants, grocery stores, and construction companies. The Wage and Hour Division (WHD) conducted 5,751 investigations of food-service establishments during fiscal year 2018, resulting in more than 41,000 employees being paid almost $43 million in back wages. A large part of the back wages resulted from improper use of tip credit provisions. While this article will address only the requirements of the Fair Labor Standards Act (FLSA), you should be aware that several states don’t allow tip credits. Almost half of the states have their own tip credit regulations that are more stringent than the FLSA.
The FLSA defines tipped employees as workers who customarily and regularly receive more than $30 in tips per month. The Act permits an employer to take a tip credit toward its minimum wage obligations to tipped employees equal to the difference between the required cash wage of $2.13 and the minimum wage. Thus, the maximum tip credit an employer can currently claim under the FLSA is $5.12 per hour (the minimum wage of $7.25 minus the minimum required cash wage of $2.13).
The regulations, which became effective in April 2011, state that an employer must provide the following information to a tipped employee before using the tip credit:
- The amount of cash wages the employer will pay tipped employees (at least $2.13 per hour);
- The additional amount claimed by the employer as a tip credit;
- An explanation that the tip credit claimed by the employer cannot exceed the amount of tips actually received by tipped employees;
- An explanation that all tips received by tipped employees are to be retained by employees except for a valid tip-pooling arrangement that is limited to employees who customarily and regularly receive tips; and
- A statement that the tip credit will not be applied to tipped employees unless they have been informed of the tip credit provisions.
The regulations state the employer may provide oral or written notice to tipped employees to inform them of the tip credit provisions. Further, the regulations state that an employer must be able to show it has provided notice. An employer that fails to provide the required information cannot use the tip credit provisions and must pay tipped employees at least $7.25 per hour and allow them to keep all tips received. To make it easier to prove that the notice has been furnished to employees, written notice should be provided.
Employers electing to use a tip credit must be able to show that tipped employees received at least the minimum wage when direct (or cash) wages and the tip credit amount are combined. If an employee’s tips and the direct wage of at least $2.13 do not equal the minimum hourly wage of $7.25, the employer must make up the difference.
Whose Tip Is It?
The regulations state that tips are the sole property of tipped employees regardless of whether the employer takes a tip credit. The regulations prohibit any arrangement between the employer and tipped employees in which any tips become the employer’s property.
The DOL’s 2011 final rule amending its tip credit regulations specifically sets out the WHD’s interpretation of the FLSA’s limitations on an employer’s use of its employees’ tips when a tip credit is not taken. The rule states in pertinent part:
Tips are the property of the employee whether or not the employer has taken a tip credit. . .The employer is prohibited from using an employee’s tips, whether or not it has taken a tip credit, for any reason other than that which is statutorily permitted: as a credit against its minimum wage obligations to the employee, or in furtherance of a valid tip pool.
The 2011 regulations allow for tip pooling among employees who customarily and regularly receive tips, such as servers, bellhops, and bartenders. Conversely, a valid tip pool may not include employees who don’t customarily and regularly receive tips, such as dishwashers, cooks, chefs, and janitors. One factor that helps determine who may be included in a tip pool is employee interaction with customers.
One positive change: The 2011 regulations did not impose a maximum contribution amount or percentage on valid mandatory tip pools. The employer, however, must notify tipped employees of a required tip-pool contribution amount and may take a tip credit only for the actual tips each tipped employee ultimately receives.
When an employee is employed in both a tipped job and a nontipped occupation, a tip credit is available only for the hours the employee spends in the tipped occupation. An employer may take a tip credit for the time a tipped employee spends performing duties related to the tipped occupation, even though the duties may not produce tips. For example, a server who spends time cleaning and setting tables, making coffee, and occasionally washing dishes or glasses is engaged in a tipped occupation even though those duties do not produce tips. However, if a tipped employee spends a substantial amount of time (more than 20% in his workweek) performing nontipped duties, a tip credit may not be taken for time spent on those tasks.
The WHD issued an administrator’s opinion letter on November 8, 2018, further delineating when a tip credit may be used for employees that are engaged in dual jobs with both tipped and nontipped duties.
A compulsory charge for service (e.g., a charge placed on a ticket when the number of guests at a table exceeds a specified limit) is not a tip. Service charges cannot be counted as tips, but they may be used to satisfy the employer’s minimum wage and overtime obligations under the FLSA. If an employee receives tips when a compulsory service charge is added, the tips may be considered in determining whether he is a tipped employee and in applying the tip credit.
If tips are charged on a credit card and the employer must pay the card company a fee, the employer may deduct the fee from the employee’s tips. Further, if an employee does not receive enough tips to make up the difference between the direct (or cash) wages (which must be at least $2.13 per hour) and the minimum wage, the employer must make up the difference. If an employee receives only tips and isn’t paid a cash wage, the employer owes the full minimum wage.
Deductions from an employee’s pay for walkouts, breakage, or cash register shortages that reduce her wages below the minimum wage are illegal. If a tipped employee is paid $2.13 per hour in direct wages and the employer claims the maximum tip credit of $5.12 per hour, no deductions can be made without reducing the employee’s pay below the minimum wage (even if the employee receives more than $5.12 per hour in tips).
The regulations state that if a tipped employee is required to contribute to a pool that includes employees who don’t customarily and regularly receive tips, the employee is owed all tips she contributed to the pool and the full $7.25 minimum wage.
Computing Overtime for Tipped Employees
If an employer takes a tip credit, it must calculate overtime based on the full minimum wage, not the lower direct wage. The employer may not take a larger tip credit for overtime hours than for straight-time hours. For example, if an employee works 45 hours during a workweek, he is owed 40 hours at $2.13 in straight-time pay and five hours of overtime at $5.76 per hour ($7.25 x 1.5 ” $5.12 in tip credits).
The National Restaurant Association, along with several other groups, filed suit against the DOL, seeking to overturn the regulations. The U.S. Supreme Court, however, allowed the rules to take effect.
Lyndel Erwin is a contributor to Alabama Employment Law Letter. After more than 35 years of experience with the Department of Labor, Erwin became a consultant with Lehr Middlebrooks Vreeland & Thompson, P.C., where he assists attorneys in providing clients with analysis and consultation concerning all of the laws and regulations enforced by the Wage & Hour Division of the U.S. Department of Labor. He may be contacted at firstname.lastname@example.org.