Tip Credit Law Basics
The Fair Labor Standards Act requires employers to pay minimum hourly wages to covered employees. In some workplaces, like restaurants and hotels, the employer’s customers may leave tips directly for the workers. This aspect of American culture raises several questions about employee rights and employer responsibilities under the FLSA. How does this form of payment impact the employer’s responsibility to pay a minimum wage? Can the employer take the tips from the worker? Can the worker who receives tips be required to give some to other employees? And if an employer improperly keeps tips, can the worker sue to recover the tips?
The 3(m) Tip Credit
The federal Department of Labor maintains excellent resources, such as Fact Sheet No. 15, for learning more about the FLSA’s requirements as they relate to tipped employees. Under the FLSA, an employer must pay employees a minimum hourly wage (currently $7.25). Also under the FLSA, tips left by customers are the property of the employee who receives them. “Tipped employees,” for purposes of the FLSA’s tip credit provisions, are employees who customarily and regularly receive tips. Only tips actually received by the employee may be counted in determining whether the employee is a tipped employee and in applying the tip credit.
The FLSA’s tip credit provision (Section 3(m)) allows an employer to take a “credit” toward its minimum wage obligation for tipped employees in an amount equal to the difference between the mandatory minimum cash wage for tipped employees (currently $2.13) and the federal minimum wage (currently $7.25). The maximum 3(m) tip credit that an employer can claim is therefore currently $5.12 per hour ($7.25 minimum wage minus the required tipped employee cash wage of $2.13). An employer may sometimes be able to claim an additional tip credit against its overtime obligations.
Section 3(m) also provides that an employer “may not keep tips received by its employees for any purposes, including allowing managers or supervisors to keep any portion of employees’ tips, regardless of whether or not the employer takes a tip credit.” 29 U.S.C. § 203(m)(2)(B).
In other words, tips are the property of the employee. This requirement, however, does not prohibit an employer from implementing a valid tip pool — i.e. requiring tipped employees to pool or share their tips with other employees who customarily and regularly receive tips, like servers, bellhops, counter personnel (who serve customers), and bussers. When the employer is taking a tip credit (and therefore, directly paying tipped employees less than the federal minimum wage), a valid tip pool may not include employees who do not customarily and regularly receive tips, like dishwashers, cooks, and janitors. However, in light of the Consolidated Appropriations Act of 2018, which amended parts of the FLSA tip requirements, when the employer is not taking a tip credit (and therefore tipped employees are directly paid at least full minimum wage) tipped employees may be required to pool their tips with non-supervisory employees who do not customarily and regularly receive tips, like cooks.
Under the FLSA, there is no maximum contribution amount or percentage on valid mandatory tip pools. The employer, however, must notify tipped employees of any required tip pool contribution amount, may only take a tip credit for the amount of tips each tipped employee ultimately receives, and may not retain any of the employees’ tips for any other purpose.
Section 3(m) Prohibits Employers From Keeping Tips Regardless of Whether They Take a Tip Credit
The language of section 3(m)(2)(B) makes clear that managers and supervisors are not permitted to keep any portion of an employee’s tips, regardless of whether the employer takes a tip credit. In other words, because tips are the property of the employee, the FLSA prohibits any arrangement whereby any part of the tip received by a tipped employee becomes the property of the employer. This means that even when the employer pays a tipped employee at least $7.25 per hour in direct wages, the employee may not be required to turn over his or her tips to the employer.
An employer who violates this section, and keeps an employee’s tips, or allows managers or supervisors to keep an employee’s tips, may be subject to a civil penalty of $1,100 for each such violation, in addition to being liable to the employee for all tips unlawfully kept, and an additional equal amount as liquidated damages. 29 U.S.C. § 216(e)(2).
Requirements to Take a Tip Credit
To qualify to take a 3(m) tip credit, an employer must first provide the affected tipped employee(s) with the following information:
1) the amount of the cash wage the employer is paying the tipped employee (must be at least $2.13 per hour);
2) the additional amount claimed by the employer as a tip credit (cannot be more than $5.12 — the difference between the $2.13 minimum required cash wage for tipped employees and the current minimum wage of $7.25);
3) that the tip credit claimed by the employer cannot exceed the amount of tips actually received by the tipped employee;
4) that all tips received by the tipped employee are to be retained by the employee except for a valid tip pooling arrangement limited to employees who customarily and regularly receive tips; and
5) that the tip credit will not apply to any tipped employee unless the employee has been informed of these tip credit provisions.
See 29 U.S.C. § 203(m)(2)(A)(ii) & 29 C.F.R. § 531.59. An employer who fails to provide this required information cannot use the 3(m) tip credit. Therefore, an employer who fails to provide this information must pay the tipped employee at least $7.25 per hour in wages and allow the tipped employee to keep all tips received. Employers taking a tip credit must also be able to show that tipped employees receive at least the minimum wage when direct wages paid to the employee are added to the tip credit. If an employee’s tips plus direct wages do not equal at least the federal minimum wage, the employer must make up the difference.
Issues Raised by Dual Jobs
Sometimes, an employee will work in more than one position for the same employer, where one of the positions is tipped and the other is not. For example, an employee might work for a restaurant both as a server (tipped) and a cook (untipped). In this situation, the employee can take the tip credit only for the hours the employee works in the tipped position. Interestingly, however, the FLSA does allow an employer to take a tip credit for some time that the tipped employee spends performing duties related to the tipped position, even though those duties do not directly produce tips. For example, a server who spends some time setting up and cleaning tables, making coffee, and occasionally cleaning glasses or dishes, is considered to be engaged in a tipped occupation even though these duties do not produce tips. See the dual jobs regulation at 29 C.F.R. § 531.56(e).
In short, tips are the property of the employee. An employer may take a tip credit against its minimum wage obligations so long as it satisfies the notice requirements and the employee receives direct wages (at least $2.13 hourly) plus tips that together meet or exceed the federal minimum wage. An employer who takes a tip credit may only require tip pooling between customarily and regularly tipped employees. An employer who does not take a tip credit can require tip pooling between tipped and non-supervisory non-tipped employees. However, under no circumstances can an employer, including managers and supervisors, keep an employee’s tips for any purpose, regardless of whether the employer takes a tip credit.
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