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Minimum Wage Law Update – Tip Credit Regulation Change

Author: Lynn Perry Parker
Categories: Employment Law & Litigation

Are you in compliance with the new minimum wage regulations applicable to tipped employees that took effect on May 5, 2011? Read on to find out.

For purposes of this article, a tipped employee is one who customarily and regularly receives more than $30 per month in tips. Employers are permitted to take a tip credit and apply it against its minimum wage obligation for tipped employees in an amount equal to the difference between the required cash wage, which must be at least $2.13, and the federal minimum wage of $7.25. The minimum cash wage is $3.63 in Maryland, $2.77 in Washington, DC and $2.13 in Virginia. If an employee is not paid any direct wage but only receives tips as compensation, the employer is required to pay the full applicable minimum wage (the minimum wage in DC is $8.25, and $7.25 in both MD and VA, which is the same as the federal rate).

To Qualify for Tip Credit:

If employers intend to use the tip credit, the new regulations require that they provide employees with the following information:

  1. the amount of the hourly cash wage the employer will pay the tipped employee;
  2. the additional amount claimed by the employer as a tip credit, which cannot exceed $5.12 (the difference between the minimum required wage and the current federal minimum wage);
  3. confirmation that the employer cannot claim a tip credit greater than the amount of tips actually received by the tipped employee;
  4. confirmation that the tipped employee is entitled to keep all tips received by the tipped employee except for a valid tip-pooling arrangement. A valid tipping pool is one that is limited to employees who customarily and regularly receive tips such as waiters, waitresses, bellhops, counter personnel (who serve customers), bus personnel and service bartenders; and,
  5. confirmation that the tip credit will not apply to the tipped employee unless the tipped employee is advised of these tip credit requirements.

Failure to provide the above information precludes employers from using the tip credit and the employer will be liable for paying the tipped employees the full applicable minimum wage (e.g. $7.25 per hour) and allowing the employee to retain all tips the employee receives.

Employers should keep in mind that they have a legal obligation to pay the minimum wage. They must be able to establish that tipped employees receive at least the minimum wage when wages directly paid are added to the tip credit amount claimed by the employer. Further, if the employee’s actual tips, together with the amount of direct wages paid by the employer, do not add up to the minimum wage, the employer must make up the difference.

It is very important for employers to understand that tips are the property of the employee. As such, it is illegal for the employer to take deductions for walkouts, breakage or register shortages that reduce the employee’s wages below the applicable minimum wage even if the tipped employee actually receives tips greater than the minimum wage. Employers cannot use tips for any purpose other than as a credit against its minimum wage obligation or in furtherance of a valid tip pool.

Tip Pools

If an employee is required to contribute to a tip pool that includes employees who do not customarily and regularly receive tips (an invalid tip pool), the employee is owed all tips the employee contributed to the pool plus the full $7.25 minimum wage. The FLSA does not mandate a maximum contribution amount or percentage on valid mandatory tip pools. However, if the employer does impose a required tip-pool amount to be contributed by tipped employees, the employer must notify the tipped employees of the requirement. The employer’s tip credit is limited to the amount of tips the employee actually receives.

Combination Jobs

If an employee works both a tipped job and a non-tipped job, the tip credit is only available for the hours devoted to the tipped job. However, the FLSA permits an employer to take the tip credit for small increments of time spent by a tipped employee performing duties related to the tipped job but that do not produce tips. Generally, the non-tip producing work must be less than 20% of work performed in the work week. Examples of non-tip producing work include a bartender that stocks bottles, washes glasses, and cleans the bar.

Service Charges

A compulsory charge for service, such as a mandatory 20% of the bill, is a service charge and not a tip. Service charges are deemed part of gross receipts. If an employee receives tips in addition to a service charge, they may be considered in determining whether the employee is a tipped employee.

Credit Cards

For tips charged to a credit card, employers may deduct from the tip charged for the benefit of the tipped employee, the percentage amount that the employer is required to pay to the credit card company. The amount paid by the employee however cannot reduce the employee’s wage below the required minimum wage. Further, the employee must be paid by the next regularly scheduled pay day meaning that the employer cannot wait for reimbursement from the credit card company before taking the tip credit.

Overtime

Employers that take tip credits must calculate overtime payments based on the full minimum wage rather than the lower direct wage payment. Also, employers must take the same tip credit for an overtime hour as it does for a straight time hour.

Strict compliance with the new statute is essential. If you have any questions about the tip credit regulations and how they apply to your operations, please contact McMillan Metro.