The tip minimum wage has made headlines this past year. The WAGES Act, introduced in Congress by Maryland Congresswoman Donna Edwards if passed would raise the federal tip minimum from $2.13 an hour for the first time since 1991. The federal tip minimum wage was originated in 1966 and at that time was 50% of the federal minimum wage. Today it is 29.4% of the federal minimum wage. Over half the states and the District of Columbia have tip minimums that are higher than the federal. These range from $2.33 an hour in Wisconsin to $7 in Hawaii. Washington is one of seven states with no tip credit law, so employers pay the state’s full minimum wage, currently at $9.32 an hour, the highest in the nation. The other states that prohibit the tip credit are: Alaska, California, Minnesota, Montana, Nevada, and Oregon. Servers who work in these states receive the same minimum wage as all other workers. Also in the news this past year are restaurants that follow the tip-free European style of service with a ‘no tipping’ policy and the employees are paid the full regular minimum wage or higher. These restaurants are in the minority and tend to be the “higher end” restaurants in some major US cities such as Los Angeles and New York City. There is a little talk on whether this practice should become the norm in the US, but at least for the foreseeable future this is not likely to happen.
By definition, a tipped employee customarily and regularly receives more than $30 per month in tips. Under federal law and in most states, employers may pay tipped employees less than the minimum wage as long as it does not fall below the tip minimum wage and employees must receive enough in tips so that their hourly rate plus tips received equals at least the regular minimum wage. The difference between the regular minimum wage and the hourly rate in which the employer pays is called a “tip credit”, which is essentially a credit for the employer towards the regular minimum wage rate. If a tipped employee does not earn enough in tips to bring his/her total compensation up to at least the applicable minimum wage, the employer has to pay the difference. Additionally, overtime must be calculated and paid on the full minimum wage for tip employees and not on the tip minimum wage or direct cash wage payment. Employers are required to provide a tip credit notice to their tip employees in advance of their pay and any pay changes. The notice informs each tipped employee about the tip credit allowance before the tip employee’s first paycheck and before any paycheck in which there is a pay change. The notice must include the amount of wage the employer will pay, the amount the employer will credit against tips as well as specific tip credit rules.
Many states allow employers to require tip pooling. For example, waiters may be required to pool their tips with bartenders and bussers for equal disbursement at the end of a shift. All employees subject to the pool have to chip in a portion of their tips, which are then divided among a group of employees. An employee can’t be required to pay more into the pool than is customary and reasonable, and the employee must be able to keep at least the full minimum wage. Only employees who regularly receive tips can be part of the pool. Employees can’t be required to share their tips with employees who don’t usually receive their own tips, like dishwashers or cooks nor can tips from a tip pool go to employers. In some states, managers or supervisors are also prohibited from receiving tips from a tip pool. There is no maximum amount or percentage of tips for a valid mandatory tip pool, according to the federal rules. But employers must notify tipped employees of any tip pool contribution requirements and are prohibited from retaining tips for any other purpose.
According to the FLSA, mandatory service charges (ie., mandatory 15% charge paid out to wait staff) are not considered tips and cannot be counted for use as a tip credit. The service charge may be counted as part of the employee’s minimum wage and overtime requirements. However, employees who receive tips in addition to a mandatory service charge are considered tipped employees by the FLSA. A well planned salary and total rewards package will motivate your employees, help your company maintain a competitive advantage and help retain key employees. Please refer to your federal and state wage and hour resources for full details regarding all tip wage regulations.
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