≡ Menu

Tip Credit Industry Practices: There Is No Safety in Numbers

In the previous years, the food service industry have seen a number of lawsuits which claimed that restaurant employers have violated the Fair Labor Standards Act (FLSA), saying that they fail to pay their tipped servers the appropriate minimum wages and overtime.  Indeed, numerous hotels and restaurants in tourism areas such as Florida and New York have faced costly litigation battles on their manner of paying their tipped employees.  The regrettable fact is that a lot of these employers are actually just keeping up with industry standards which defy the law, albeit done only technically.  Employers are inclined to think that they are in compliance with the rules because “that’s basically how the others in the industry do it.”  Sadly in this case, however, we can’t say that there is “safety in numbers.”

Since this kind of FLSA claim has grown to be so rampant, it is necessary that restaurants who claim a tip credit understand the basic working components or practical aspects of tip credits.

Under the FLSA, 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 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.

Common Tip Pool and Tip Credit Violations

A)  Managers and Supervisors Share in the Tip Pool

Workers who are considered tipped employees are those who have adequate direct contact with customers and receive tips not below $30 a month from them.  This includes busboys, service helpers and waitresses, but does not include dishwashers, laundry room attendants, cooks, and the like.

C)  Percentage of Tip Pool Are Made As a Reason to Decrease the Employees’ Direct Wage

The tip pool could not be made as a reason to decrease the direct wage of the tipped employee.  The direct wage is the amount which comes from the employer to meet the minimum wage.  Stipulations of the DOL Wage and Hour Division rule says that employers can only obligate employees to contribute a maximum of 15% of their individual tips to the tip pool.  When the employers choose to use percentages of total sales as the benchmark for tip pool sharing, the important thing to remember is to make sure that the maximum 15% rule is applied.

D)  Employers Do Not Follow Important Notification Requirements about Tip Credits

Many workers sue their employers claiming that they were not informed about the tip credit arrangements. This happens because several employers who apply the tip credit arrangement fail to comply with the notice requirements, or have attempted to, but were not able to explicitly make their workers understand.  To fix these misunderstandings and to limit future confusions and misinterpretation, the FLSA have come up with a revised rule requiring employers to explain the details to their employees, preferably by putting everything in writing, where they need to appropriately inform their workers about the tip credit provisions.  When an employer decides to apply the tip credit, he must be able to present a written proof that he was able to explain to his tipped employee the following:

  • 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 requirement  (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 and that valid tip pools are limited to workers who regularly and routinely  receive tips from customers;
  • for employers who require tip pools, the employee should be notified of the required tip pool contribution prior to implementation; that 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.

The employer must also be able to prove that the employee is being given at least the minimum wage when the direct pay and the tip credit are combined.

E)  Employers Allow Improper Deductions from Minimum Wages

Employers cannot subtract the cost of breakages of equipment, uniforms, cash register shortages or walk-outs from the minimum wages of tipped employees.

F)  Employers Fail to have An Accurate Calculation of Tipped Employees’ Overtime Pay

Overtime work hours of tipped employees must be carefully calculated and paid based on the worker’s appropriate hourly rate.   To be clearer, the overtime calculations must be built according to the worker’s full minimum wage (presently at $7.25 according to the FLSA) and not based on the direct pay ($5.12 if the minimum wage is $7.25).  Only when such overtime hourly rate are calculated and added to the employees’ receivable pay can the employers begin to deduct the total tip credit from the wages due.

G)  Employers Focus on Federal Laws and Fail to Abide By their own State Laws

So as not to directly violate state regulations, employers should be familiar with the rules enforced in their state.  A number of states prohibit or keep a tight rein on the amount of tip credit an employer can apply to his employees’ wages.  For example, restaurant and hospitality employers in Alaska, Washington, California and Oregon cannot use tip credits.  Florida limits the tip credit claim to $3.02.  It is important to be informed and updated with local labor laws.

To avoid these pitfalls, it is strongly advised that restaurant operators start discussing with their legal counsels the correct implementation of tip credits and tip pools, taking due importance to the DOL’s Final Rule announcing the revised regulations .  Samples of the written notifications to their tipped employees could also be found in the National Restaurant Association’s Update on the New Federal Regulations for Employers with Tipped Employees.   For specific state laws on tip credit limitations, DOL’s Wage Hour Division Minimum Wages for Tipped Employees prove to be especially useful.