A tipped employee is an individual who regularly earns more than $30 per month in tips. Any tips earned by a tipped employee belong to the employee. An employer is legally prohibited from taking tips away from employees. The employer can use the amount of tips earned by an employee as a credit towards its minimum wage obligation. This is known as a “tip credit.”
The tip credit allows the employer to a take a tip credit and apply it towards its minimum wage obligation for tipped employees. The tip credit would be the difference between the tipped minimum wage of $2.13 and the hourly minimum wage of $7.25 for non-tipped employees. The maximum tip credit an employer can claim is $5.12 (Minimum wage rates vary from state to state. The wage rate listed here is the federal minimum wage)
An employee is entitled to retain tips earned, with the exception of a valid tip pool or sharing arrangement among other tipped employees. The tip pool can only include employees who customarily and regularly receive tips.
Prior to an employer using the tip credit, he must provide the following information to the tipped employee:
- the amount of cash wage the employer is paying a tipped employee, which must be at least $2.13 per hour;
- the additional amount claimed by the employer as a tip credit, which cannot exceed $5.12 ( the difference between the minimum required cash wage of $2.13 and the current minimum wage of $7.25);
- that the tip credit claimed by the employer cannot exceed the amount of tops actually received by the tipped employee;
- 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
- that the tip credit will not apply to any tipped employee unless the employee has been informed of these tip credit provisions.
The employer can provide this information to employee either orally or in written notice. Any employer who fails to provide his or her tipped employees with this information cannot use the tip credit and will, under the Fair Labor Standards Act, must pay the tipped employee the federal minimum hourly wage of $7.25.
An employer who uses the tip credit provision of the FLSA must be able to show that all tipped employees are being paid the minimum when combining the their wage and the tip credit. If an employee’s wage of at least $2.13 combined with their tips does not equal the federal hourly minimum wage of $7.25 per hour, the employer must make up the difference.
Tips are the sole property of the tipped employee who earned them regardless of whether the employer takes a tip credit. Under the FLSA, an employer cannot retain any portion of the tip earned. Even if the employee was being paid the hourly rate of $7.25 per hour, the employer is not entitled to any tips earned.
The only exception to this is a valid tip pool or sharing arrangement among employees who customarily and regularly receive tips. The employer must notify all tipped employees of the tip pool. The employer can only take a tip credit for the amount of tips each tipped employee actually receives and the employer cannot retain any of the employees’ tips.
When tips are added to a credit card payment, the employer can deduct the amount of he or she must pay the credit card company, from the amount owed of tips owed the employee. For example, if a credit card company charges 3% to process the payment, the tipped employee would receive 97% of the tips earned.
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