Who Took the Tips From the Tip Jar? – Tip Credit and Tip Pools

Tipping practices and minimum wage laws vary from state-to-state. Under the Fair Labor Standards Act (FLSA), the tipping rules are pretty straightforward and the consequences for violating them are significant. This article covers the basic tipping rules under the FLSA.

Who Are Tipped Employees?

Under federal law, tipped employees are those who customarily and regularly receive more than $30 per month in tips. These employees include waiters, waitresses, bellhops, counter personnel (who serve customers), bussers, and service bartenders. In addition, the tips must be received for an employee’s work, and not for merely because an employee is in a tip pool arrangement (discussed below). Tipped employees do not include workers such as dishwashers, cooks, chefs, and janitors.

Who Can Participate in a Tip Pool?

The most important factor to remember with respect to tips is that tips are employee property. Only tipped employees can participate in a tip pool. Before a tip pool arrangement can be implemented, the employer must notify tipped employees of any required tip pool contribution amount. However, there is no legally required amount or percentage.

What Are the Consequences of an Invalid Tip Pool?

Non-tipped workers who receive tips from the tip pool automatically invalidate the tip pool for all tipped employees. If the employer or non-tipped employees participate in the tip pool, you must pay the tipped employees the full minimum wage and any tips the tipped employees contributed to a tip pool that included non-tipped occupations. In other words, an employer can no longer take a tip credit and the employees’ tips must be returned.

What is a Tip Credit?

Generally speaking, a tip credit allows an employer to pay less than the federal or state minimum wage by deducting a certain amount of money an employee makes from tips. State laws vary as to how much an employee must make in tips to be considered a tipped employee; whether a tip credit can be taken; and the minimum cash wage an employer is required to pay. Only 7 states do not provide for some mechanism for a tip credit to be taken. Under federal law, there is specific information you must provide to employees before an employer can take a tip credit:

1. The amount of cash wage the employer is paying a tipped employee, which must be at least $2.13 per hour;
2. The additional amount claimed by the employer as a tip credit, which cannot exceed $5.12;
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.

What are the consequences for failing to provide the required information to tipped employees?

The tip credit cannot be taken and tipped employee must receive $7.25 per hour and all of his tips he received.

One last important point, the tipped credit only applies to time spent in the tipped occupation. For employees who work in both tipped and non-tipped occupations, the tip credit can only be taken for the tipped hours. For example, if John is both a cook and a service bartender. The tip credit can only be taken for his time worked as a bartender.

Modern Business Associates is a HR outsourcing company offering flexible, cost-efficient solutions for payroll, tax accounting, benefits administration, risk management and HR consulting. If you would like more information about how the experts at MBA can help your business operations, please email us at info@MBAhro.com or call (888) 622-6460 or visit www.MBAhro.com.