Tip Credit

What are Tipped Employees Rights under the FLSA?

Posted on September 1, 2020 by Rose H. Robbins, Esq.

Tipped employees are those who customarily and regularly receive more than $30 per month in tips. Tips are the property of the employee and the employer is prohibited from using an employee’s tips for any reason other than as a credit against its minimum wage obligation to the employee (“tip credit”) or in furtherance of a valid tip pool. Only tips actually received by the employee may be counted in determining whether the employee is a tipped employee and in applying the tip credit.

What is a tip credit?   

Section 3(m) of the FLSA permits an employer to take a tip credit toward its minimum wage obligation for tipped employees equal to the difference between the required cash wage (which must be at least $2.13) and the federal minimum wage. Thus, the maximum tip credit that an employer can currently claim under the FLSA section 3(m) is $5.12 per hour (the minimum wage of $7.25 minus the minimum required cash wage of $2.13). Under certain circumstances, an employer may be able to claim an additional overtime tip credit against its overtime obligations.

What is a tip pool?  

The requirement that an employee must retain all tips does not preclude a valid tip pooling or sharing arrangement among employees who customarily and regularly receive tips, such as waiters, waitresses, bellhops, counter personnel (who serve customers), bussers, and service bartenders. A valid tip pool may not include employees who do not customarily and regularly received tips, such as dishwashers, cooks, chefs, and janitors.

 What are the requirements for a tip credit to be considered valid?

  The employer must provide the following information to a tipped employee before the employer may use the FLSA 3(m) tip credit:

1)the amount of cash wage the employer is paying 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 of $2.13 and the current minimum wage of $7.25);

3)that the tip credit claimed by the employer cannot exceed the amount of tips actually received by the tipped employee;

4)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

5)that the tip credit will not apply to any tipped employee unless the employee has been informed of these tip credit provisions.

The employer may provide oral or written notice to its tipped employees informing them of items 1-5 above. An employer who fails to provide the required information cannot use the section 3(m) tip credit and therefore must pay the tipped employee at least $7.25 per hour in wages and allow the tipped employee to keep all tips received.

Employers electing to use the tip credit provision must be able to show that tipped employees receive at least the minimum wage when direct (or cash) wages and the tip credit amount are combined. If an employee’s tips combined with the employer’s direct (or cash) wages of at least $2.13 per hour do not equal the minimum hourly wage of $7.25 per hour, the employer must make up the difference.

Employee Retention of Tips: A tip is the sole property of the tipped employee regardless of whether the employer takes a tip credit. 1 The FLSA prohibits any arrangement between the employer and the tipped employee whereby any part of the tip received becomes the property of the employer. For example, even where a tipped employee receives at least $7.25 per hour in wages directly from the employer, the employee may not be required to turn over his or her tips to the employer.

Employee Tip Pooling: As noted above, the requirement that an employee must retain all tips does not preclude a valid tip pooling or sharing arrangement among employees who customarily and regularly receive tips. The FLSA does not impose a maximum contribution amount or percentage on valid mandatory tip pools. The employer, however, must notify tipped employees of any required tip pool contribution amount, may only take a tip credit for the amount of tips each tipped employee ultimately receives, and may not retain any of the employees’ tips for any other purpose.

Employee Dual Jobs: When an employee is employed by one employer in both a tipped and a non-tipped occupation, such as an employee employed both as a maintenance person and a waitperson, the tip credit is available only for the hours spent by the employee in the tipped occupation. The FLSA permits an employer to take the tip credit for some time that the tipped employee spends in duties related to the tipped occupation, even though such duties are not by themselves directed toward producing tips. For example, a waitperson who spends some time cleaning and setting tables, making coffee, and occasionally washing dishes or glasses is considered to be engaged in a tipped occupation even though these duties are not tip producing. However, where a tipped employee spends a substantial amount of time (in excess of 20 percent in the workweek) performing related duties, no tip credit may be taken for the time spent in such duties. This circumstance is the basis of much litigation.  In Rafferty v. Denny’s, Inc., Case No. 1:19-CV-24706-DLG (S.D. Fla. Aug. 3, 2020), the plaintiffs sought to bring a nationwide collective action covering all of the company-owned Denny’s restaurants across the United States.  The Court ruled on Plaintiff’s Motion for Conditional Certification of FLSA Collective Action and to Permit Notice and Equitable Tolling. The Court denied certification based on the following two considerations.  Firstly, the Court stated,  “Taking into consideration the small number of class members provided by the Plaintiff, and the large size of the class Plaintiff seeks to certify, the Court finds that Plaintiff has made an insufficient showing of willingness from others to join the suit.” Secondly, the Court found, “The Court finds that Plaintiff is not similarly situated to the members of the proposed nationwide class of 8400 Denny’s servers. Plaintiff does not identify a uniform corporate-wide policy that violates FLSA. Instead, the class of employees which Plaintiff seeks to represent contains individual employees who have worked at different restaurants, in different states, for different managers, and, most likely, in quite different working conditions. Granting Plaintiff’s Motion would defeat the aim of judicial efficiency that class action suits were created to promote.”

Service Charges to Customers: A compulsory charge for service, for example, 15 percent of the bill, is not a tip. Such charges are part of the employer’s gross receipts. Sums distributed to employees from service charges cannot be counted as tips received, but may be used to satisfy the employer’s minimum wage and overtime obligations under the FLSA. If an employee receives tips in addition to the compulsory service charge, those tips may be considered in determining whether the employee is a tipped employee and in the application of the tip credit.

Credit Cards: Where tips are charged on a credit card and the employer must pay the credit card company a percentage on each sale, the employer may pay the employee the tip, less that percentage. For example, where a credit card company charges an employer 3 percent on all sales charged to its credit service, the employer may pay the tipped employee 97 percent of the tips without violating the FLSA. However, this charge on the tip may not reduce the employee’s wage below the required minimum wage. The amount due the employee must be paid no later than the regular pay day and may not be held while the employer is awaiting reimbursement from the credit card company.

What are some typical problems in the tipped employee situation?

Minimum Wage Problems:

  • Where an employee does not receive sufficient tips to make up the difference between the direct(or cash) 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 minimum wage is owed.
  • Where deductions for walk-outs, breakage, or cash register shortages reduce the employee’s wages below the minimum wage, such deductions are illegal. When an employer claims an FLSA 3(m) tip credit, the tipped employee is considered to have been paid only the minimum wage for all non-overtime hours worked in a tipped occupation and the employer may not take deductions for walkouts, cash register shortages, breakage, cost of uniforms, etc., because any such deduction would reduce the tipped employee’s wages below the minimum wage.
  • 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 the full $7.25 minimum wage and reimbursement of the amount of tips that were improperly utilized by the employer.

Overtime Problems:

  • Where the employer takes the tip credit, overtime is calculated on the full minimum wage, not the lower direct (or cash) wage payment. The employer may not take a larger FLSA 3(m) tip credit for an overtime hour than for a straight time hour. Under certain circumstances, an employer may be able to claim an additional overtime tip credit against its overtime obligations.
  • Where overtime is not paid based on the regular rate including all service charges, commissions, bonuses, and other remuneration.

The determination of whether improper compensation deductions have occurred in any circumstance is best made by an experienced attorney. Call attorney Rose H. Robbins at (954) 946-8130 for a FREE  telephone consultation about your claim for minimum wage or unpaid overtime wage violations.

Or you can complete the simple form below for confidential submission to our office.  Please be advised that by merely submitting this form, no Attorney-Client relationship is formed with this law firm.   You must provide your name,  home or cell phone number, your email address and your zip code in the form.  We serve the following counties: Broward, Highlands, Indian River, Martin, Miami-Dade, Monroe, Okeechobee, Palm Beach, and St. Lucie.