Jun 04, 2024
The Fair Labor Standards Act (FLSA) requires that employees receive a federal minimum wage in exchange for their work. However, did you know that workers in the foodservice industry are not always paid an hourly minimum wage? Why is that?
Essentially, within the foodservice industry, workers earn gratuities from customers as a way of thanking the workers for a job well done. These gratuities are given to workers in addition to the cash wages they already earn per hour. As a result, the FLSA allows employers to pay tipped workers a lower hourly wage because a large portion of their pay stems from tips.
How much money do workers make in tips?
The exact amount of money that tipped workers will receive depends on various factors such as the location of the restaurant or bar where they work and the days of the week the employee works. However, in general, a lot of tipped employees — including the likes of bartenders and servers — can expect to earn substantial amounts in tips.
According to federal law, as long as employees are allowed to accept tips from customers, employers only have to pay tipped workers a wage of $2.13 per hour. In doing so, these employers are meeting their minimum wage obligations as set forth by the FLSA. They can do this by taking advantage of a credit known as the tip credit.
That way, the tips that the employees receive end up amounting to full wage, if not more. The tip credit allows employers to include gratuities as part of their employees’ total wages, thus meeting minimum wage requirements, allowing employers to pay employees less than otherwise required.
What happens when employers claim the tip credit?
As an employer, if you claim the tip credit, you are required to ensure that your employees receive the equivalent of minimum wage every workweek. The combination of money in the form of gratuities and cash wages must meet or exceed the minimum wage and overtime compensation required under federal law in your area.
Who is entitled to tips?
Tips are the property of tipped employees. As such, you as an employer cannot claim ownership of any amount of the tips, no matter how small. However, federal law allows for the pooling and sharing of tips among employees.
That said, after looking into the rules and regulations set forth by federal law, take a moment to consult state laws in your area. Depending on where you do business, you might not be eligible for the tip credit in the first place. Also, many state minimum wage requirements exceed the federal minimum wage, which means the minimum wage threshold that you are responsible for meeting might be greater.
How to claim the tip credit
If you want to claim the tip credit, make sure you are eligible to do so. From there, you must be able to prove that each and every tipped worker received at least minimum wage in combined hourly wages and tips per week. If your tipped employees do not make at least minimum wage with the help of gratuities, you are liable for making up the difference for each employee.
What to do before claiming the tip credit
Before you accept the tip credit, you must notify all tipped employees of your intentions to accept the credit. You are required to provide your tipped workers with this notice either orally or on paper. Otherwise, you are not entitled to accept any portion of the tip credit.
The amount of money that you claim in the form of the tip credit cannot exceed the difference between your state’s minimum wage and $2.13, which is the minimum wage for tipped employees set forth by the federal government. Additionally, you cannot claim a tip credit that exceeds the amount of tips that your tipped workers receive.
All of the tips that your tipped workers receive must be given to and remain in the possession of each tipped worker, with the exception of pooled tips. You cannot keep, for any reason, any portion of the tips that your employees receive. There are no exceptions, even if an employee offers the tips to you.
Similarly, you are not allowed to require tipped employees to give any portion of their tips to you. Even if you are a manager or supervisor of tipped employees, the only instance in which you are allowed to accept tips for yourself is if a customer tips you directly. This is true even in the case of pooled-tip arrangements.
What about tips provided via credit card payments?
If you are charged transaction fees for credit card payments, you can subtract the percentage of the transaction fee from the original tip paid by the customer. That lower dollar amount is then paid to the employees.
However, keep in mind that it is unacceptable to reduce the employee's wage to the point that it falls under the required minimum wage threshold. Since employees must not be paid less than the mandated minimum wage, you must pay your employees adequately even if credit card payments have not fully processed in time.
How to handle service charges on bills
Service charges are not recognized as tips under the FLSA. At the same time, service charges can be utilized as a way of satisfying your obligations, in terms of both minimum wage and overtime pay.
Just make sure you keep records whenever you take a tip credit. Start by documenting which employees rely at least partially on tips. Always keep tabs on how much each employee reports in tips per week as well as the total amount of money collected in tips by the employer.
From there, hold on to schedules that reflect how many hours each employee worked on any given workday. Last but not least, signify which of those hours were eligible for tips. This is often all hours unless certain schedules denote otherwise.
All in all, remember that you as an employer cannot claim non-tipped workers for the tip credit. In other words, you are required by law to pay all non-tipped workers minimum wage for every hour they work unless overtime is involved, in which case the mandatory hourly wage is greater.
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