tip credit calculation

What are Tip Credits? Should I be Concerned About How my Employer Handles Them?

Under federal law and the laws of most states, employers are allowed to pay employees who earn tips an hourly rate that is below the minimum wage, as long as the income they earn from their tips makes up the difference. This is commonly known as a “tip credit”, because the tips the employee earns are counted toward their employer’s obligation to pay them the minimum wage. 

Tip credits can only be claimed by an employer if an employee earns at least $30.00 in tips per month. In addition, if the combined wages and tips of the employee does not equal at least $7.25 per hour (the current federal minimum wage and the current minimum wage in Alabama), the employer is required to make up the difference.

Employers are allowed to pay as low as $2.13 per hour and take a tip credit of up to $5.12 to bring the employee’s combined hourly rate up to at least $7.25. This can be problematic for employees that do not earn tips all the time – for example, a restaurant worker who works most of the time as a waitress, but sometimes fills in as a hostess. This could also become an issue with employees who earn higher tips during certain times of the year (such as the holiday season), but their tips drop significantly during slow seasons.

Tip credits are fairly common in the hospitality industry, but they can create some problems that employees should be aware of:

Overtime Pay

During busy seasons especially, employees are often asked to work overtime. Calculating overtime pay is fairly simple with a regular hourly employee who is paid minimum wage or higher. The employer simply pays the employee their regular hourly rate x 1.5 (i.e., time and a half) for the overtime hours. For example, if you earn $10.00 per hour and work 5 hours of overtime, you are paid $15.00 per hour on those 5 hours.

Things can become a lot more complicated if you and tip credits into the mix. Employers who take a tip credit are still required to pay employees time and a half on their full minimum wage. So, if an employer pays $2.13 per hour and takes a $5.12 per hour tip credit, they need to pay time and a half on $7.25 per hour, not $2.13 per hour. If an employer is paying time and a half on only 2.13 per hour in this scenario, this would be a wage violation.

Tip-Pooling

Employees may be required to participate in a tip pool in which their tips are shared with other employees, but supervisors and managers are not allowed to participate in such a pool. As of 2018, this is true regardless of whether or not the employer takes a tip credit. If any type of employer allows management to be part of a tip pool, this would be another violation of wage and hour laws. Along these same lines, if an employer were to require employees to give back a percentage of their tips to cover overhead or other employer expenses, this would also be against the law.

Tip-Pooling for staff that does not regularly receive tips (e.g., dishwashers, cooks, and other back house staff) is also forbidden in establishments where employers take a tip credit. If the employer does not take a tip credit, these types of employees are allowed to participate in the pool.

Credit Card Processing Fees

Many employers make a regular practice of subtracting processing fees from employee tips that are put on a credit card. For example, the average fee imposed by the banks to process a credit card charge is 3%. Employers in most states are allowed to take out that fee and give only 97% of the tip to key employee. This could create problems when an employer takes tip credits if the 3% deduction puts the employee below the $7.25 per hour minimum wage and the employer fails to make up the difference.

Contact Alabama Employment Law Attorney Kira Fonteneau

If you are a tipped employee in Alabama, your employer takes tip credits, and they have committed violations of the Fair Labor Standards Act (FLSA), there are legal remedies available; which may include compensation for the amount of wages you were shorted as well as monetary damages. It is also a violation for an employer to terminate or discriminate against an employee who files a complaint or participates in an FLSA legal proceeding.

For skilled guidance with FLSA violations and all other employment law matters, call attorney Kira Fonteneau today at 205-564-9005 for a free consultation or send us a message through our online contact form.

What are Tip Credits, and Should I be Concerned about How my Employer Handles these Credits?

tip pooling

New Federal Law Prohibits Tip-Pooling with Management for All Employers

In many professions, workers depend heavily on tips to earn a livable income. This is especially true in the hospitality industry, where bartenders, waiters and waitresses, delivery drivers, hotel maids, and many others derive the vast majority of their income from tips. Some employers pay less than the minimum wage to employees who earn at least $30.00 per month or more in tips if these employees are able to make up the difference through their tip income, and as long as the employer is in compliance with the Federal Labor Standards Act (FLSA).

One of the most important provisions of the FSLA that pertains to tipped employees is that, if an employer pays below the minimum wage and lieu of tips (also known as taking a “tip credit”), employers, supervisors, managers, and “back house staff” (i.e., those who work behind the scenes such as dishwashers and cleaning staff) are not allowed to participate in any “tip-pooling”.

Tip-pooling means taking all of the tips of a group of employees and dividing them among each employee, sometimes equally and sometimes according to other preset guidelines. Employers who take a tip credit and allow management or back house staff to participate in a tip pool are in violation of the FSLA, making them liable for damages.

A provision in the Consolidated Appropriations Act for 2018 amended the FSLA to prohibit employers from allowing management to be part of a tip-pooling arrangement regardless of whether or not the employer takes the tip credit. This is a major change to FSLA guidelines regarding tipped employees, because employers may now be in violation of the Act even if they are paying their employees (who are receiving tips) the full minimum wage. Employers who don’t take a tip credit had until March 23 of 2018 to ensure that their managers and supervisors were excluded from any tip pools.

What has Changed under the New Law?

For employers who already take a tip credit, nothing has really changed with the new amendment – they were already prohibited from allowing management and back house staff to participate in tip pools, and they are still prohibited from doing so. So, the only employers that are really affected by this change are those who do not take the tip credit.

As mentioned earlier, the most significant change is that employers who pay full minimum wage are no longer allowed to let their managers and supervisors participate in tip pools as the Act equates such practices to an employer keeping their tips. In the Department of Labor (DOL) field assistance bulletin pertaining to the amendment, the DOL states that it would use the duties test for the executive exemption (29 C.F.R. § 541.100(a)(2)-(4)) “to determine whether an employee is a manager or supervisor for purposes of section 3(m).”

This means that the prohibition of managerial participation in tip pools might not apply to lower level supervisors or team leads if they do not have authority over certain areas such as hiring, firing, disciplinary actions, etc. That said, these are initial field guidelines that could be changed over time, and the courts could apply this rule differently in the future as well. As always, speak with an experienced employment law attorney to discuss your specific case, how the law is currently being applied, and your legal rights and options.

Another area that was addressed in the field assistance bulletin was whether or not back house staff can participate in tip-pooling for employers who pay a full minimum wage. For now, these employers can allow tips to be pooled with cooks, dishwashers, and other non-management and nonsupervisory staff that are not “customarily and regularly tipped.” However, this could be subject to change as additional rules are made in the future to further clarify the 2018 amendment.

Contact Alabama Employment Law Attorney Kira Fonteneau

If you believe your employer may be in violation of FSLA tip-pooling guidelines or has engaged in any other FSLA violation against you, you may be entitled to damages, which may include compensation for tips illegally withheld and additional monetary damages. Call attorney Kira Fonteneau today at 205-564-9005 for a free and confidential consultation to discuss your case. You may also send us a message through our online contact form.