In a recent ruling by the U.S. Department of Labor (DOL), the ‘tip credit’ which is covered under the federal Fair Labor Standards Act (FLSA) was recently redefined and the result affects employers of tipped employees.
Under Section 3(m) of the FLSA, employers are allowed to credit a portion of the employee’s tips toward the FLSA-required minimum wage (currently $7.25 per hour). It is required that employers pay a cash wage of not less than $2.13 per hour, which limits the tip credit to $5.12 per hour ($7.25−$2.13).
Tipped employees include those working in professions which regularly receive more than $30 a month in tips. A tip is defined to include all of the following:
- It is an optional payment made by the patron for services;
- The patron decides how much payment to make; and
- The patron decides to whom the payment is made.
This means that all gratuities are not considered tips under the FLSA and therefore do not fall under the tip credit guidelines.
Further, Section 3(m) indicates employers must communicate the following to tipped employees in advance to be eligible to take the tip credit. Although the notice is not required to be in writing, we recommend employers provide a written notice to all tipped employees.
- Employee is informed in advance by the employer of the Section 3(m) provisions (below).
- Employee retains all of the tips he or she receives, except for amounts pooled among employees who regularly receive tips.
- The amount of the cash wage paid to the employee.
- The amount the employer is taking as a credit against tips received, which cannot exceed the difference between the FLSA minimum wage and the cash wage that is paid;
- Any additional amount the employer claims as a tip credit cannot exceed the value of the tips the employee receives.
The DOL acknowledges that the FLSA does not impose a maximum contribution percentage on valid mandatory tip pools and maintains that an employer is required to inform employees of any required tip pool contribution amount.
In the future, employers can expect the DOL to have a heightened focus on tipped-employee pay practices and in preparation should review their tipped employee compensation policy. In addition to the DOL’s requirement, keep in mind to review your state or local laws for tipped employee requirements.
Here’s a copy of the DOL’s ruling.