Tips and Gratuities

What are Tipped Employees Rights under the FLSA?

October 19, 2020 by Rose H. Robbins

Tipped employees are those who regularly receive more than $30 per month in tips. Tips belong to the employee but the employer may use tips as a credit against its minimum wage obligation to the employee (“tip credit”) or for a valid tip pool. Only Tips must actually be received by the employee for employer to use them  in applying the tip credit. Restaurants, parking valet services, nail salons and car washes typically have tipped employees

What are typical employer tip violations situations?

*Manager or owner requires tip sharing but tip pool is invalid

*Manager or owner deducts certain expenses from your tips

*Tipped employee is required to do non-tipped work

*Tipped employees are not paid overtime at the correct rate

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). An employer may be able to claim an additional overtime tip credit against its overtime obligations in some circumstances.

What is a valid tip pool?  

Manager or employer may set up a valid tip pooling or sharing arrangement among employees who customarily and regularly receive tips. However, 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 following information must be given 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;

2)the additional amount claimed by the employer as a tip credit;

3)that the tip credit claimed by the employer cannot be more than the  tips actually received by the tipped employee;

4)that all tips received by the tipped employee must be retained by the employee except for a valid tip pooling arrangement limited only to tipped employees; and

5)that the 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: The entire tip belongs to 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:  A valid tip pooling or sharing arrangement among employees who customarily and regularly receive tips is acceptable. The FLSA does not impose a maximum contribution amount or percentage on valid mandatory tip pools. The employer must follow rules: tipped employees must be notified of any required tip pool contribution amount; employer may only take a tip credit for the amount of tips each tipped employee ultimately receives; and employer 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.

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.  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?

A.) 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.

B.) 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 worker rights attorney. Call attorney Rose H. Robbins at (954) 946-8130 for a FREE  and confidential telephone consultation about your claim for minimum wage or unpaid overtime wage violations.

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