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Have service employees? Here's how to use the tip credit

service employees
Alexandre Diard
service employees

The Fair Labor Standards Act says to pay tipped employees at least the federal minimum wage, which is $7.25 per hour. Per the act, you can pay tipped employees direct wages, with the required minimum being $2.13 per hour. Also, you can take a tip credit of up to $5.12 per hour to bring the employee's wages up to the federal minimum wage. If the employee's tips do not equal at least $5.12 per hour, you must pay more than $2.13 per hour in direct wages so that the employee will receive at least the federal minimum wage.

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To be able to use the FLSA's tip credit provision, you'll need to show that the employee receives the federal minimum wage after the direct wages and the tip credits are combined. If the employee receives only tips and no direct wages, you cannot take the tip credit and must pay the full minimum wage.

Overtime and the tip credit

You may use the tip credit for overtime compensation purposes. To arrive at the hourly overtime rate for a tipped worker, multiply the federal minimum wage of $7.25 per hour by 1.5. Then, subtract the tip credit, which cannot be more than $5.12 per hour.

Tipped service employees with dual jobs

The FLSA permits you to use the tip credit for tipped employees who perform related non-tipped duties — such as a waitress who also makes coffee, toasts bread, sets tables and washes dishes from time to time. However, you cannot take the tip credit if the employee spends more than 20 percent of his or her time on related non-tipped duties.

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Credit cards

Where tips are charged on a credit card and the employer has to pay the credit card company a percentage on each sale, the employer may pay the service employees the tip, less that percentage. As an example, if a credit card company charges an employer 3% on all sales charged to its credit service, the employer may pay the tipped service employees 97% of the tips without violating the FLSA. That said, this charge on the tip may not reduce the service employee's wage below the required minimum wage. The amount owed to the service employees must be paid no later than the regular pay day and may not be held while the employer is awaiting reimbursement from the credit card company.

Retention of tips and tip pooling

Tips are the sole property of the tipped service employees regardless of whether the employer takes a tip credit. The FLSA forbids any arrangement between the employer and the tipped service employees whereby any part of the tip received becomes the property of the employer. Even when tipped service employees receive a good wage directly from the employer, the service employees are not necessarily required to turn over their tips to the employer. 

The requirement that service employees retain all tips does not preclude a valid tip pooling or sharing arrangement among service employees who regularly receive tips. The FLSA does not impose a maximum contribution amount or percentage on valid mandatory tip pools. The employer, however, must notify tipped service employees of any required tip pool contribution amount, and only take a tip credit for the amount of tips each tipped employee ultimately receives, and may not retain any of the service employees' tips for any other purpose.

Requirements for claiming the tip credit

In order to use the tip credit, you must give each tipped employee the following information:

- The direct wage you will pay the employee
- The tip credit amount you will claim
- Notification that the tip credit will not exceed the employee's tips
- Notification that the employee will get to keep all of his or her tips, unless there's a valid tip pooling arrangement
- Notification that the tip credit will not be used unless you inform the employee of it

If you fail to provide proper notice to the employee, you cannot take the tip credit and must pay the employee at no less than the federal minimum wage.

State tip credit laws

The state may require a higher minimum direct wage than the FLSA. In some states, the maximum tip credit exceeds the FLSA's.

In most states, the combined minimum direct wage and tip credit is equal to or more than the federal minimum wage. However, in Wyoming, the combined amount is $5.15 per hour, which is less than the federal minimum wage. Therefore, tipped employees in Wyoming who are also subject to the FLSA must receive no less than the federal minimum wage.

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