As If Employers Needed Another Reminder, Here Are 8.4 Million More Reasons To Get The Tip Credit Right

A couple of weeks ago, a Philadelphia based sports bar chain entered into a consent order with the U.S. Department of Labor (DOL) and filed a request with the E.D. Pennsylvania for approval of a separate settlement with individual affected employees who alleged the employer improperly took tips from servers and violated the Fair Labor Standards Act's (FLSA) minimum wage, overtime, and record-keeping requirements. All told, the employer ponied up over $8.4 million to settle these allegations.

Tipped employees are entitled to receive at least minimum wage. Consequently, if application of a tip credit or a mandatory tip pool leaves the employee short of minimum wage, there is a problem and potentially great exposure. Because the cost of getting it wrong can be steep, now is the time for employers in the service and hospitality industries to review the deceptively simple rules associated with compensating tipped employees under the FLSA. Accordingly, here is a summary of the basics:

Who are Tipped Employees?

Tipped employees are those who customarily and regularly receive more than $30 per month in tips. To customarily and regularly receive tips, the employee must do so more than occasionally, but it may be less than constantly. Servers, counter personnel who serve customers, bussers, bartenders, and bellhops perform important customer service functions and are typically recognized as tipped employees. On the other hand, dishwashers, chefs, and expeditors are not. (29 U.S.C. § 203(t); 29 C.F.R. § 531.57).

The Tip Credit

The Amount of the Credit. The FLSA allows an employer to take a partial offset against its minimum wage obligations to a tipped employee provided that certain requirements are met. However, it is important to note that not all states allow an employer to take a tip credit.

Under Section 3(m) of the FLSA, the tip credit is equal to the difference between the wage paid to the employee (which must be at least $2.13) and the federal minimum wage. Consequently, the maximum tip credit that an employer can currently claim is $5.12 per hour (the minimum wage of $7.25 minus the minimum required cash wage of $2.13).

Required Advanced Notice To Employee. To be able to take the tip credit, an employer must provide the employee with advanced notice and adhere to the requirements set forth in the notice. While notice can be written or verbal, employers should memorialize that notice was provided in writing. As set forth by the DOL, the notice...

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