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FSLA Tip Credit
Jul 30, 2020 10:01:46 AM
How to Apply the Tip Credit
Employers usually must pay a non-exempt employee at least the federal minimum wage, which is currently $7.25 per hour. However, employers may apply an employee's tips as a credit against federal minimum wage requirements and against certain state and local minimum wage requirements. Follow these steps to take advantage of this tip credit.
- Step 1: Confirm That the Employee Earns at Least $30 a Month in Tips
Employers may claim the tip credit only for an employee who customarily and regularly receives at least $30 a month in tips. Customarily and regularly means more than occasionally but less than constantly. Tips are money "presented by a customer as a gift or gratuity in recognition of some service performed for him," as opposed to a compulsory service charge. For example, the 15% surcharge that many restaurants automatically bill large parties is a service charge, not a tip, even if the wait staff ultimately receives that money.
- Step 2: Inform the Employee About the Tip Credit
The law requires employers to inform the employee about how the tip credit works. Although the employee may be informed orally, the U.S. Department of Labor (DOL) encourages employers to provide written notice.
- Step 3: Ensure the Employee Retains All of His or Her Tips
The employee must retain all of his or her tips unless there is a valid tip-pooling arrangement. This requirement holds true regardless of whether or not the employer claims the tip credit. So, for example, the employer may not pay the employee the full minimum wage and then collect any tips he or she receives.
- Step 4: Determine the Number or Hours During Which the Tip Credit May Be Claimed
If the employee spends all of his or her time in an occupation that produces tips, the tip credit may be claimed for each hour worked. If the employee is employed in both a tipped and a non-tipped occupation (such as an employee employed as both a maintenance person and a waitperson) the tip credit is available only for hours spent by the employee in the tipped occupation. However, an employer may take the tip credit for some time that the tipped employee spends in duties related to the tipped occupation (known in the industry as "side work"), even though such duties are not by themselves directed toward producing tips.
The DOL will not limit the number of duties related to a tip-producing occupation that may be performed as long as they are performed contemporaneously with direct customer-service duties and all other requirements of the FLSA are met.
- Step 5: Check State and Local Requirements
Many states and localities have minimum wage rates higher than the federal minimum wage. Others have their own unique tip credit provisions. Some have both. Employers should check state and local requirements carefully before claiming the tip credit.
- Step 6: Deduct Any Credit Card Fees (Optional)
When an employee is tipped on a credit card, the employer may reduce that tip by the same proportion the credit card company charges the employer to process its transactions. For example, if the employee receives a $100 tip on a credit card, and the credit card company charges the employer 5% on all transactions, the employer may claim $5 for itself and pay the employee only $95.
- Step 7: Add Up the Employee's Total Tips
At the end of each pay period, the employer should add up all the tips the employee received. Compulsory service charges may not be counted as tips. Any credit card deductions (see Step 6) should be deducted from this total.
- Step 8: Calculate the Minimum Wage Owed
Multiply the minimum wage (currently $7.25) by the number of hours during which the employee worked this pay period.
- Step 9: Calculate the Maximum Possible Tip Credit
Multiply $5.12 by the number of hours during which the employee performed tip-producing work (see Step 4) in each pay period to calculate the maximum possible tip credit.
- Step 10: Calculate the Actual Tip Credit
If the maximum possible tip credit (see Step 9) is less than or equal to the amount of tips the employee received in the pay period (see Step 7), the employer may claim the maximum possible tip credit. If the maximum possible tip credit (see Step 9) is greater than the amount of tips the employee received in the pay period (see Step 7), the employer may claim only the amount of tips received as the tip credit.
- Step 11: Pay Cash Wages
Subtract the actual tip credit (Step 10) from the minimum wage owed (Step 8). The difference must be paid to the employee in cash. If the employee earned enough tips to qualify for the maximum possible tip credit (Step 9), then the cash wage will be $2.13 per hour.
- Step 12: Include Tip Credit in Any Overtime Calculations
When tipped employees work overtime, their regular rate of pay is determined by dividing their total remuneration for employment in the workweek by the total number of hours actually worked by the employee in that workweek for which such compensation was paid. A tipped employee's regular rate of pay includes the amount of tip credit taken by the employer per hour (no more than the minimum wage minus $2.13), the reasonable cost or fair value of any facilities furnished to the employee by the employer, and the cash wages including commissions and certain bonuses paid by the employer. Any tips received by the employee in excess of the tip credit need not be included in the regular rate.
- Step 13: Fulfill Record Keeping Requirements
Employers that claim the tip credit must maintain and preserve certain additional records. Please check your local state requirements.
Scenario 1 - Full Tip Credit
Sam works as a waiter for Randy's Restaurant. He is paid biweekly. In one two-week period, Sam works 80 hours and earns $750 in tips.
To calculate how much of a tip credit it can claim, Randy's Restaurant takes the following steps:
- Calculate the minimum wage owed. Randy's Restaurant is located in a state where the minimum wage is $7.25 an hour. Sam worked 80 hours, so he is owed at least $580 ($7.25 multiplied by 80 hours equals $580).
- Calculate the maximum possible tip credit. The maximum possible tip credit that Randy's Restaurant may claim for Sam is $5.12 per hour (the difference between the minimum cash wage for tipped employees ($2.13 an hour) and the minimum wage ($7.25). Sam worked 80 hours, so the maximum possible tip credit is $409.60 ($5.12 multiplied by 80 hours).
Randy's Restaurant may claim the maximum possible tip credit of $409.60 because Sam received more than that amount in tips. Randy's Restaurant must pay Sam a cash wage of $170.40 (the minimum wage owed of $580 minus the tip credit of $409.60).
Scenario 2 - Partial Tip Credit
In the next two-week period, Sam works 70 hours and earns $350 in tips.
To calculate how much of a tip credit it can claim, Randy's Restaurant takes the following steps:
- Calculate the minimum wage owed. Sam worked 70 hours, so he is owed at least $507.50 ($7.25 multiplied by 70 hours equals $507.50).
- Calculate the maximum possible tip credit. Sam worked 70 hours, so the maximum possible tip credit is $358.40 ($5.12 multiplied by 70 hours).
Randy's Restaurant may not claim the maximum possible tip credit of $358.40 because Sam did not receive that much in tips. Only the actual tips Sam received ($350) may be claimed as the tip credit. Randy's Restaurant must pay Sam a cash wage of $157.50 (the minimum wage owed of $507.50 minus the tip credit of $350).
Scenario 3 - Dual Jobs
In the next two-week period, Sam works 80 hours and earns $750 in tips. However, business is slow, so Sam washes dishes for 30 hours during this period and waits tables for the remaining 50 hours.
To calculate how much of a tip credit it can claim, Randy's Restaurant takes the following steps:
- Calculate the minimum wage owed. Sam worked 80 hours, so he is owed at least $580 ($7.25 multiplied by 80 hours equals $580).
- Calculate the maximum possible tip credit. Because Sam spent more than 20 percent of his time doing work that does not produce tips, Randy's Restaurant may claim a tip credit only for the hours when Sam was waiting tables. Sam waited tables for 50 hours, so the maximum possible tip credit is $256 ($5.12 multiplied by 50 hours).
Randy's Restaurant may claim the maximum possible tip credit of $256 because Sam received more than that amount in tips. Randy's Restaurant must pay Sam a cash wage of $324 (the minimum wage owed of $580 minus the tip credit of $256).
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