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Tip Credits Under the Fair Labor Standards Act (FLSA) - FLSA Update No. 2

December 08, 2017

By: Barry Dorans

The Fair Labor Standards Act (“FLSA”) requires employers to pay $7.25 per hour plus overtime to most workers but allows tipped employees to be treated differently by use of the “tip credit”. Unfortunately, there are many rules regarding the tip credit and it is likely that most employers are not applying the tip credit correctly.

To take advantage of the tip credit, the employer must: 1) pay the tipped employee at least $2.13 per hour, 2) take a credit of up to $5.12 per hour based on the tips actually received by the tipped employee, 3) the tipped employee must be informed in advance of the provisions of tip credit law, and 4) all tips must be received and retained by that tipped employee unless there is a valid tip pooling arrangement.

Where employees keep their own tips, it is fairly simple for the employer. The employer must keep accurate records of tips received by the employee and have evidence that it informed the employees of the provisions of the tip credit law. The part that can get confusing is if an employee works more than 40 hours per week, overtime is calculated on the full minimum wage of $7.25 per hour, not the $2.13 per hour and the employer is not allowed to take a credit in excess of $5.12. Thus, for a tipped employee that works overtime, the employee must receive at least $10.88 per hour ($7.25 x 1.5) and the employer must pay at least $5.76 per hour ($10.88 - $5.12 the maximum tip credit).

The bigger pitfall for employers occurs where waiters and waitresses share tips in a tip pool. If the tip pool is invalid, the employer is not allowed to use the tip credit and the cash tips kept by the employee are totally disregarded. Thus, assume an employee was given a base pay of $2.13 per hour and received $7.00 per hour from the tip pool, resulting in $9.13 per hour. If the tip pool is invalid, the employer will owe $5.12 of straight time that that employee worked. What’s worse is that the employer will likely owe liquidated damages, which is an additional 100% of the unpaid minimum wage. So an employee may have earned more than $9.00 per hour, yet the employer can be required to pay an additional $10.25 per hour for straight time and liquidated damages.

A tip pool is invalid if it includes a person who is not eligible. Persons who are not normally tipped, such as cooks, dishwashers and/or janitors are ineligible. So if tips are pooled and some portion of the pool gets paid to a cook, dishwasher or janitor, the entire tip pool is held invalid. Owners are also ineligible to participate in the tip pool. Thus, where an owner works as a waitress and collects tips from tables he/she waits on, if that money is put into the pool and the owner receives any money from the tip pool, the entire tip pool is invalid and the company would owe unpaid minimum wages to each of the waiters and waitresses in the pool plus 100% of that amount as liquidated damages.

Accordingly, employers who use a tip credit need to be very careful that they keep the appropriate records and that they comply in all respects with the provisions of the tip pool or they can be forced to pay a significant penalty.