Tip Basics Tip Legality January 16, 2024 5 min read

Tipping Laws: Understanding Tipped Employee Rights and Employer Responsibilities

Tipping Laws: Understanding Tipped Employee Rights and Employer Responsibilities

Defining a “Tipped Employee”

A tipped employee is someone who regularly gets tips on the job, like waiters, bartenders, bellhops, or Uber drivers. It’s all about consistently receiving tips, usually more than $30 a month, in their specific job. These individuals depend on tips for income, and there are specific rules about how employers can use tips in deciding their pay.

Example: A bartender getting over $30 in tips monthly is a tipped employee, but a cashier in the same place, not getting tips, isn’t.

Establishing Tipped Employee Wages

Tipped employees have a minimum base cash wage of $2.13 since August 20, 1996. Employers can use some of an employee’s tips to meet this wage, but there are rules. If employers use a tip credit against the minimum wage, they must tell their employees. Employees keep all their tips unless part of a tip pool—sharing tips among tipped employees.

Example: A server earning $2.13 per hour can use $350 in weekly tips to meet the minimum wage requirement.

If state law provides more protection to employees than the federal Fair Labor Standards Act (FLSA), employers must follow the state rule. This could mean a higher cash wage than the federal standard or no use of tip credits. You can find links to your state labor department here for more information.

Example: In Arizona, where the state mandates a $11.35 minimum cash wage, the employer must comply for better employee protection.

Understanding Tip Credits:

Tip credits, under FLSA, let employers offset part of the minimum wage using tips. The base hourly wage must be at least $2.13, with the tip credit making up the difference to the federal minimum wage ($7.25). This ensures flexibility for employers while ensuring fair earnings for tipped employees.

Example: Meet Mike, a server earning $2.13 base wage with a $5.12 tip credit. With $100 in tips, his total earnings meet or exceed the federal minimum wage.

Restrictions on Tip Usage:

Employers, including managers, can’t keep any part of employees’ tips, even with a tip credit. The Fair Labor Standards Act strictly forbids it. Managers can keep tips directly from customers for personal services but can’t join tip pools.

Example: Consider a café where the manager occasionally serves tables to support the team during busy hours. One day, the manager provides excellent service to a group of customers who tip for the outstanding experience. In this scenario, the manager is allowed to keep the tips directly received from those specific customers.

Tip Pooling Regulations:

Tip pooling involves employees sharing tips. In traditional pools, only tipped employees participate; in nontraditional, all employees can share tips, but everyone must be paid at least minimum wage. Managers are excluded from all pools, and tips must be distributed promptly.

Example: In a hotel, bellhops and housekeeping staff may join a tip pool where they contribute their tips. The pooled tips are then divided among them based on a predetermined arrangement.

Overtime Laws:

When tipped employees work extra hours, their regular rate includes cash wages, tips, and facilities provided by the employer. Extra tips beyond a limit don’t count in this calculation. Overtime pay is calculated at 1.5 times the regular rate. If you want more details, you can check part 778 of the Fair Labor Standards Act.

Example: Let’s say Mike is a waiter who usually makes $2.13 per hour in cash wages and receives tips. In a regular week, he works 40 hours and makes $200 in tips. The minimum wage is $7.25.

Regular Rate Calculation:

  • Cash wages: $2.13/hour x 40 hours = $85.20
  • Tips: $200
  • Total earnings for the week: $85.20 (cash wages) + $200 (tips) = $285.20
  • Regular rate: $285.20 ÷ 40 hours = $7.13 per hour

Tip Credit Calculation:

The tip credit is the difference between the minimum wage and the cash wage:

  • $7.25 (minimum wage) – $2.13 (cash wage) = $5.12 per hour
  • The maximum tip credit per hour is $5.12.

Overtime Pay Calculation:

  • Overtime pay rate (1.5 times regular rate): $7.13 (regular rate) x 1.5 = $10.70 per hour
  • Overtime hours: If Mike works 45 hours in a week, the extra 5 hours are considered overtime.
  • Overtime pay: $10.70 (overtime rate) x 5 hours = $53.50
  • Total weekly earnings with overtime pay: $285.20 (regular earnings) + $53.50 (overtime pay) = $338.70

This illustrates how Mike’s regular rate, tip credit, and overtime pay are calculated, considering his cash wages, tips, and overtime hours worked.

Credit Cards:

Employers can deduct credit card transaction fees from employees’ tips under the Fair Labor Standards Act. This ensures employees get a fair share, considering credit card fees, with limitations on deductions.

Service Charges:

Service charges on bills aren’t considered tips. Sums from service charges can be used for minimum wage and overtime obligations. This rule defines what counts as a tip and how service charges affect compensation.

Recordkeeping:

Detailed records of tipped employees, reported tips, increased wages due to tips, and hours worked are crucial for enforcing tipping laws. This ensures compliance with minimum wage and overtime pay regulations.

Conclusion

Understanding tipping laws is crucial for a fair tipping environment. Simplify and enhance compliance with TipHaus—an innovative platform streamlining tip calculations, automating FLSA compliance, and ensuring transparent recordkeeping. TipHaus is your partner in managing tips efficiently, promoting both compliance and fairness in the dynamic world of tipping laws.

Source: Fact sheet #15: Tipped employees under the Fair Labor Standards Act (FLSA). DOL. (n.d.). https://www.dol.gov/agencies/whd/fact-sheets/15-tipped-employees-flsa 

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