The Fair Labor Standards Act (“FLSA”) permits employers to pay certain employees tipped wages. 29 USC 203(m) & (t) The current federal tipped wage rate is $2.13. It is important to note that many states have adopted standards for paying employees who receive tips that are different than the federal standards. As with most federal and state laws, the law that benefits the employee the most should be applied. The standards for paying employees tipped wages under the FLSA are discussed below.
An employer is permitted to pay an employee the tipped wage rate if the employee customarily and regularly receives more than $30 a month in tips. 29 USC 203(t); 29 CFR 531.51 Additionally, the employee must earn the standard minimum wage rate, currently $7.25, when tips earned are combined with wages earned under the tipped wage rate. 29 USC 203(m); 29 CFR 531.51 If tips are insufficient to make up the difference between the standard minimum wage rate and the tipped wage rate, the employer must make up the difference. The difference between the standard minimum wage rate and the tipped wage rate is referred to as a tip credit, meaning the tips earned by the employee are counted as a credit towards the standard minimum wage rate requirement.
A tip is an amount of money given as a gift or gratuity to an employee by a customer after the employee has performed some type of service for the employee. Whether a tip is given, to whom it is given, and the amount of the tip are determined solely by the customer. 29 CFR 531.52
Tips may be paid in cash, by check, or credit card. Gifts given in forms other than cash or a cash equivalent, such as theater ticket and merchandise, are not considered to be tips under the FLSA. 29 CFR 531.53
Tips are the property of the employee who receives them, even if the employer does not take a tip credit for them. An employer may only use tips as a tip credit, although employers may require employees to participate in a valid tip pool. An employer is prohibited from using tips for any other reason. 29 CFR 531.52
A”tipped employee,” as defined by the FLSA, is an employee”engaged in an occupation in which he customarily and regularly receives more than $30 a month in tips.” 29 USC 203(t)
Even when employees qualify as tipped employees, an employer is required to pay them the standard minimum wage rate (currently $7.25 per hour) for all hours worked. The FLSA permits employers to meet this requirement by taking a tip credit based on the tips earned by employees. Thus, an employer may pay tipped employees the tipped wage rate ($2.13) and then count tips earned by the employees towards the standard minimum wage rate. If the amount of tips earned by an employee are insufficient to cover the gap between the tipped wage rate and the standard wage rate in any workweek, the employer must pay the employee the difference. For purposes of tipped employee requirements, the maximum tip credit an employer may take is the difference between the tipped wage rate and the standard minimum wage rate, which currently would be $5.12. Any tips earned by an employee greater than the tip credit are not considered to be remuneration paid to the employee by the employer for employment within the meaning of the FLSA (see overtime for tipped employees). The tip credit may be taken in conjunction with any other allowable credits toward the standard minimum wage, such as for board, lodging, or other facilities. 29 USC 203(m) & (t); 29 CFR 531.59
Mandatory gratuity or service fees
Mandatory gratuity or service fees are not considered tips of purposes of the FLSA. Instead, they are considered part of the employer’s gross receipts. Therefore, an employer may not count them towards the tip credit, even if he distributes all or part of them to the employees. The employer may only count non-compulsory tips towards the tip credit.
If an employee only receives distributions from mandatory gratuities or service fees and does not receive non-compulsory tips, they may not be considered tipped employees and must be paid the standard minimum wage rate. If an employee receives both tips and distributions from mandatory gratuities or service fees, the employee must receive at least $30 a month in tips, independent of the distributions from mandatory gratuities or service fees to be considered a tipped employee.
29 CFR 531.55; DOL Wage & Hour Opinion Letter 2005-31
Employers are required to notify employees of their intention pay the tipped wage rate and take tip credit. The notice must include the following:
- wage rate that will be paid to the tipped employee;
- the amount by which the wages are increased because of the tip credit claimed by the employer, which may not exceed the tips actually received by the employee;
- the employee is entitled to retain all tips they receive except when the employer uses a valid tip pooling arrangement; and
- the tip credit will not be applied to any employee who has not been informed of these requirements.
29 USC 203(m) & (t); 29 CFR 531.59
Tip pooling is permitted under the FLSA and may be required by an employer. Tip pooling involves taking tips earned by all employees during a certain period of time and redistributing them amongst the employees based on a pre-established formula. A common example of one type of tip pooling is waiters sharing tips with busboys. The employer must inform employees of tip pooling requirements and may not retain any of the tips for any other purpose. For purposes of the tip credit, employers may only take credits for employees equal to the tip amount ultimately received by employee after tip pool distribution. 29 CFR 531.54
More than $30 in a month
Employees qualify for tipped wages if they customarily and regularly earn $30 a month in tips, regardless of how many hours each week the employee works. There is no requirement that the employee work full-time. 29 CFR 531.56(a) Additionally, the $30 threshold must be met individually by each employee. It does not matter if collectively employees on average customarily and regularly earn $30 a month. The tip credit may only be taken for those individual employees that meet the threshold. 29 CFR 531.56(c) It is also important to note that although the $30 threshold qualifies an employee to be paid the tipped wage, the employer must still ensure that the employee is paid the standard minimum wage rate after tips earned are combined with tipped wages earned. 29 CFR 531.56(d)
In determining whether an employee customarily and regularly earns $30 a month, an employer does not need to rely on calendar months. Instead, an employer may calculate the total tip per month based on any reoccurring monthly period starting from any date in each month. 29 CFR 531.56(b)
In some instances, employees split time between job duties where tips are customarily and regularly earned and job duties where they are not. Whether an employer may take a tip credit (pay the tipped wage rate) for all hours worked depends on the type of non-tipped work performed. If the non-tipped work is related to the tipped work, the tip credit may be taken for all hours worked. An example of this situation is a waiter who spends part of his time cleaning tables or performing light cooking duties. If the non-tipped work is not related to the tipped work, the tip credit may only be taken for those hours in which tipped work is performed. The other non-tipped work would need to be paid at no less than the standard minimum wage rate. An example of this situation is where a maintenance man also works part time as a waiter. 29 CFR 531.56(d)
Customarily and regularly
Customarily and regularly, for purposes of the FLSA’s tip credit requirement, means a tipped employee receives more than $30 a month in tips more than occasionally, but does not need to meet the threshold every month. Employees who only meet the $30 tip threshold during seasonal spikes in business, such as during certain holiday seasons, would not meet the customarily and regularly requirement. Conversely, an employee who typically meets the threshold, but every once in a while fails to earn $30 in tips in a month due to illness, vacation, or seasonal fluctuations, would still meet the customarily and regularly requirement and would qualify to be paid tipped wages. 29 CFR 531.57
Partial months due to starting or ending employment
An employer may take the tip credit for an employee who only works for part of a month due to either beginning or ending employment if the tips earned by the employee meet the $30 threshold on a prorated basis. For example, if an employee begins working on the 16th of the month and earns $20 dollars in tips for the month, the employer could take the tip credit for the employee because the employee’s tips tend to show that the employee would have met the threshold if they would have worked the whole month. 29 CFR 531.58
Overtime for tipped employees
For purposes of calculating overtime, a tipped employee’s regular rate of pay is calculated by taking the employee’s total wages earned in a workweek plus any tip credit and other permissible credits taken by the employer and dividing them by the total number of hours worked by the employee in the workweek. An employee’s regular rate of pay does not need to include the amount of tips earned by the employee beyond the tip credit taken by the employer, which is capped at the difference between the tipped wage rate and the standard minimum wage rate (currently $5.12). The tips earned in excess of the maximum tip credit are not considered remuneration for employment within the meaning of the FLSA. 29 CFR 531.60