Tipped Employees Under the FLSA
Wage-related rules for tipped employees, such as those working as bartenders or valets who receive money from satisfied customers, are governed by the Fair Labor Standards Act (FLSA). Tipped employees are those who regularly receive more than $30 in tips on a monthly basis, according to the FLSA. Tips received are considered the sole property of the tipped employee, although the pooling of tips is allowed.
The total amount of tips often exceeds wages paid by the employer but tips often fluctuate with customer volume and other factors. While employers are required to pay tipped employees the minimum wage, they may factor tips into their wage obligation in most states (called a "tip credit").
Employees are entitled to an employer-paid wage of at least $2.13 per hour, more if tips received do not total $5.12 an hour (based on the current minimum wage of $7.25). This means employers can claim what is called a "tip credit" of up to $5.12 against the federal minimum wage, as outlined by section 3(m) of the FLSA.
Employers must provide tipped employees with the following information in order to use the tip credit:
- Amount of wage the employer will pay
- Amount the employer will credit against tips
- Notification that the tip credit will not exceed the value of tips received
- Notification that the tip credit can be used only if the employee has been informed of the FLSA's tip credit rules
- Notification that all tips received must be retained by the employee, except when collected for a valid tip pool
Notice of the above items may be provided either orally or in writing. Employers who fail to do so must pay tipped employees the federal minimum wage and allow them to retain all tips received. If the combination of employer-paid wages and tips do not add up to the minimum wage, the employer must make up this difference.
The FLSA allows tip pooling (or sharing) arrangements among service employees who typically receive tips. For example, waiters may be required to pool their tips with bartenders and bussers for equal disbursement at the end of a shift. Tipped employees may not be compelled to pool tips among employees who do not normally receive tips, including cooks and dishwashers.
There is no maximum amount or percentage of tips for a valid mandatory tip pool, according to the federal rules. But employers must notify tipped employees of any tip pool contribution requirements and are prohibited from retaining tips for any other purpose.
Tipped Employees with Dual Jobs
Tipped employees sometimes work non-tipped duties for part of their time, often within the same shift. For example, waiters may also spend some of their time making coffee, folding napkins and cleaning tables. The FLSA allows employers to use the tip credit for time spent doing such tasks, even though they do not directly generate tips. In such cases, the employee is considered to be working a tipped occupation. But employers may not use the tip credit when the tipped employee spends more than 20 percent of his or her time doing related duties that do not generate tips.
Service Charges vs. Tips
Mandatory service charges are not considered tips, according to the FLSA. That means a mandatory 15 percent service charge that is paid out to wait staff, for example, cannot be counted as tips received for use as a tip credit. The service charge may be counted as part of the employee's minimum wage and overtime requirements. However, employees who receive tips in addition to a mandatory service charge are considered tipped employees by the FLSA.
Tips and Credit Card Fees
Customers who pay by credit card typically write in their tip. But since employers incur a roughly 3 percent fee for each credit card transaction, they are permitted to recoup the portion of this fee applicable to an employee's tip. For example, assuming a 3 percent fee, the FLSA permits an employer to pay the tipped employee 97 cents of a $1.00 tip if it is charged on a credit card. Employees are entitled to payment of tips charged on credit cards on or before the regular pay day and cannot be withheld while the employer is waiting for reimbursement.