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New Tip Credit Requirements

It’s been three months now. Have you started to implement the new regulation yet?

As you might have heard, new regulation was issued on April 5th that affects the restaurant industry as a whole. Shortly after it took effect on May 5, 2011 and deals with what’s known in the restaurant business as a tip credit.

Under the Fair Labor Standards Act, employers are allowed to pay their servers less than the minimum wage as long as their tipped employees receive tips that amount to at least $30 a month.  A tipped employee is a worker who takes on an occupation where he or she customarily and normally receives more than $30 a month worth of tips.  The difference between the hourly-salary rate paid by the employer and the standard federal minimum wage is what we call a tip credit.

Presently, the FLSA permits employers to apply a maximum tip credit of $5.12 and compensate the tipped employee an hourly rate of at least $2.13.  The law commands that tipped employees be able to get all of their tips, but gives them and only them, (excluding management and non-tipped employees) the option to share their tips with each other by pooling it.

On May 5, 2011, an amended Department of Labor regulation took effect, addressing a few areas under the FLSA that particularly affect tip credit requirements for restaurant employers.  The DOL‘s Final Rule which announces the emended tip regulations touched three basic matters:

  1. The ownership of employee tips
  2. Arrangements for tip-pooling
  3. Required notification to employees

The Ownership of Tips

The law states that tips or gratuities are the property of the employees, and such fact prohibits an employer from using the employees’ tips for any other reason other than to complete the difference between the direct wage and the minimum wage.  Tips are not to be considered wages, and an employer’s use of the tips only applies when tip credit is taken – any remaining difference is to be retained by the employee.  For example, in a scenario where the required minimum wage is $7.25 an hour, and tipped employees get tips that amount to $10 an hour, an employer who utilizes the maximum tip credit to complete the minimum wage prerequisite has to shell out a cash wage of $2.13 and is allowed to “use” $5.12 out of the $10 that the employer received.  The remaining $4.88 is still the possession of the employee, and cannot be touched in any way by the employer for any other purpose.  That means the employee receives a total of $12.13.

Arrangements for Tip Pooling

Employer-run tip pooling procedures are allowed, as long as it meets certain conditions.  The first of these conditions is that the participating employees are not obliged to contribute a bigger percentage of their tips to the pool than what is “reasonable and customary.”  Secondly, employers should not keep any of the tips and lastly, the tips can only be divided among those who regularly and routinely receive tips. This means dishwashers, janitors and cooks are not included.  The tip credit that employers are allowed to utilize should be based on the amount that each employee ultimately receives.  Employers are also required to notify his or her employees of any obligatory tip pool contribution amount prior to implementing it.

DOL’s position on this in the past has been that it will consent to pool contributions that do not exceed more than 15% of the employees’ tips.  The amended regulation now removes DOL’s 15% limitation on the tipped employees’ contributions. This was done in hopes that tipped employees will not be hurt in any way if a bigger percentage of their tips go to a tip pool.

Required Notification to Employees

This new section is very essential, stating that tip credits cannot be utilized by the employer unless the employee has been notified by the employer of the provisions of the tip credit regulations.  This is in consideration that a lot of tipped employees are immigrant and low-wage workers who do not understand the complicacies of tip credit rules.  The DOL believes that requiring employers to present a comprehensible written explanation to their tipped employees upon hire would help the workers to better understand the rules. This would likewise assist the employers to better protect themselves from possible litigations that arise from tip credit misunderstandings.

Such provisions include:

  • the actual cash wage amount that is coming from the employer to the tipped employee
  • the amount of tips that would be credited as wages to meet the minimum wage prerequisite  (which is held at a maximum of $5.12 per hour)
  • that all tips due to the employee should be kept by the employee except for those that are added to a legitimate tip pool.  Valid tip pools are limited to workers who regularly and routinely  receive tips from customers
  • that the tip credit cannot be applied to any employee who has not been informed by the employer of these tip credit provisions
  • for employers who require tip pools, the employee should be notified of the required tip pool contribution prior to implementation; the tip credit that can be used should be based on the amount that the employee actually receives; and the employer cannot, in any way, keep any of the tips for other purposes than tip credit.