Employment 101: Federal Minimum Wage and Tipped Employees

Are Tipped Employees entitled to a minimum wage?

Yes. Under the Fair Labor Standards Act (FLSA), an employer may pay a tipped employee less than minimum wage by taking a “tip credit”. However, the law has several requirements that must be met in order for the tip credit exception to apply, and the employee must be provided notice of the requirements. Specifically, the employer must notify the employee of the following:

  1. The amount of the cash wage the employer pays a tipped employee, which must be at least $2.13 per hour;
  2. The additional amount claimed by the employer as a tip credit, which cannot exceed $5.12 (the difference between the minimum required cash wage and the current federal minimum wage of $7.25);
  3. That a tip credit claimed by the employer cannot exceed the amount of tips actually received by the employee;
  4. That all tips received by the employee are to be retained by the employee except for a valid tip pooling arrangement, which must be limited to tipped employees; and
  5. 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 fails to meet these requirements, then the tipped employee will be entitled to the full minimum wage under the FLSA.

Who Are “Tipped Employees”?

According to the Department of Labor, tipped employees are “those who customarily and regularly receive more than $30 per month in tips.” Under the Department of Labor’s 80/20 rule, employees who perform both tipped and non-tipped may not qualify for the tip credit. According to this rule, if an employee spends in excess of 20 percent of the workweek performing non-tipped duties (e.g. washing dishes, cleaning, or cooking), no tip credit may be taken for the time spent on such duties. To be clear, if the employee performs dual roles for an employer, then the employer may only take a tip credit for the time the employee spent on the tipped occupation. For example, if an employee serves as a cook for 20 hours per week and a waiter the other 20 hours per week, the employer must pay the employee the full minimum wage for the 20 hours as a cook but may take a tip credit on the other 20 hours.

Note: In Marsh v. J. Alexander’s, the Ninth Circuit U.S. Court of Appeals rejected the 80/20 rule; however, other circuits, including the Eighth, continue to follow the rule.

What If Tips Received Are Less Than Tip Credit Amount?

Employers must be able to show that employees receive at least the minimum wage. If a tipped employee’s cash wages and tips do not add up to at least the minimum hourly wage of $7.25 per hour, then the employer is obligated to make up the difference.

Are Tips Property of the Employer or Employee?

Tips are the sole property of the tipped employee. However, an employer may have a valid mandatory tip pooling or tip sharing arrangement amongst its tipped employees (i.e. employees who customarily and regularly receive tips). The employer must provide tipped employees with advance notice of the tip pooling obligations. Additionally, for tips paid by a credit card, the employer may deduct a percentage equal to that charged by the credit card company for processing the payment.

Compulsory service charges, on the other hand, are not considered a tip; rather, they are part of the employer’s gross receipts. Nevertheless, service charges may be collected by the employer and distributed to employees as wages counting towards the minimum wage obligations.

How Is a Tipped Employee’s Overtime Pay Calculated?

The overtime rate for a tipped employee is based on the federal minimum wage, not the direct cash wage. Under the FLSA, hourly employees must generally be paid time and a half for hours worked in excess of a 40 hour workweek. For tipped employees, this means the overtime rate must be at least one and half times the minimum wage of $7.25 (or $10.88). However, the employer may still take a tip credit of up to $5.12 per hour – the max allowed under the FLSA. As such, the direct cash overtime wage for a tipped employee must be a minimum of $5.76 per hour ($10.88 - $5.12 = $5.76).