This blog looks into the criteria and obligations an employer must satisfy with respect to tipped employees. Pursuant to the Fair Labor Standards Act (FLSA), a tipped employee is an employee who regularly receives $30 per month in tips.
If you’re a tipped employee or are interested in learning more about tip credits and pools, keep reading. Section 3(m)(2)(A) of the FLSA governs the criteria for employers to take tip credits. A tip credit is the amount an employer takes towards the applicable federal/state’s minimum wage and overtime obligations. From here, this tip credit is utilized by the employer where the employee who regularly receives tips from customers coupled with wages, meets this minimum wage threshold. So here in Texas the applicable minimum wage is $7.25 for non-tipped employees.
For tipped employees, an employer is obligated to pay the tipped employee at least $2.13 per hour. Here’s where the tip credit comes in, an employer is permitted to take the tip credit that is equal in difference between the direct or cash wage it pays the tipped employee and the applicable minimum wage.[1] (Please note that the federal minimum wage is $7.25 but some states may retain a higher minimum wage such as California for example.) So going off of the federal minimum wage and the minimum wage in Texas, the maximum tip credit that an employer may claim is $5.12 per hour. An employer is not permitted to retain a tip credit which exceeds the amount of tips the tipped employee actually receives. Employers who claim this tip credit must be able to show that in each workweek, the tipped employee is making the applicable minimum wage with direct or cash wage plus tips.
Prior to taking a tip credit, an employer must inform employees of the above mentioned criteria. Moreover, an employer must also ensure that all tips received by the employee are kept by the employee. An exception to this is where tipped employees participate in a tip pool.
Tip pooling is a concept provided for by the FLSA, it permits employers to require employees to share their earned tips with other eligible employees. Currently, there is not a limit on the percentage or amount an employee may contribute to the pool. Other guidelines which dive further into tip pooling can be found on the Department of Labor’s (DOL) website regarding tipped employees. Notably, one of the most important takeaways from the tip pooling concept is who may not participate. The FLSA provides that an employer, manager, or supervisor may NOT participate in tip pooling. In fact, the FLSA prohibits them from retaining any tips even where a tip credit is not utilized by the employer OR whether the tips are received directly or via tip pool. An employer is also prohibited from requiring a tipped employee to forfeit tips to it, a manager, or supervisor. A manager or supervisor is only permitted to retain tips that they directly receive from a customer for a service he or she provided directly.
In sum, tip credit is real. Sometimes misconceptions regarding the applicable minimum wage of tipped employees looms but this blog aims to resolve any confusion. The reason why some tipped employees, especially here in Texas, receive $2.13 per hour is because of the employer’s applicable tip credit. So long as the employee is receiving minimum wage each workweek, the employer is permitted to take a tip credit that is the difference between the direct or cash wage it pays directly to the tipped employee and the applicable minimum wage.
For more information on tip pooling please reference the DOL’s website. Consultations can be scheduled with me here.
[1] https://www.dol.gov/agencies/whd/fact-sheets/15-tipped-employees-flsa.