Wednesday, August 24, 2016

A wage/hour primer for employers with tipped employees

Employment Law 360 is reporting that a waitress is suing Walt Disney World for improperly taking a “tip credit” and paying her less than the minimum wage even though she spent significant time performing non-tipped work.

That story got me thinking that in the nine-plus years of this blog, I’ve never discussed how the FLSA impacts tipped employees. If you employ tipped workers, today is your lucky day.

So what is a tip credit anway?

Under the FLSA, tipped employees are those who customarily and regularly receive more than $30 per month in tips. Because tips are the sole property of the employee, and not the employer, an employer is prohibited from using an employee’s tips for any reason other than: (1) as a credit against its minimum wage obligation to the employee (“tip credit”); or (2) as part of a valid “tip pool”.

The FLSA permits an employer to take a tip credit toward its minimum wage obligation for tipped employees equal to the difference between the required hourly cash wage (which in Ohio is reduced $4.05 for tipped employees) and the minimum wage. Thus, the maximum tip credit that an Ohio employer can currently claim under the FLSA is $4.05 per hour (the minimum wage of $8.10 less the minimum required cash wage of $4.05). 

If an employee’s tips combined with the employer’s cash wages do not equal the minimum hourly wage ($8.10), the FLSA requires that the you, the employer, make up the difference.

What about overtime? How do we calculate that rate for tipped employees?

When an employer takes the tip credit, it must calculate overtime on the full minimum wage, not the lower cash wage payment.

What do you mean when you say that “tips are the sole property of the employee”?

Regardless of whether an employer takes, or does not take, a tip credit against an employee’s minimum wage, an employer may never require an employee to relinquish any part of his or her tips (except for valid tip pools; see below).

Do we have to tell our tipped employee that we are taking a tip credit against their minimum wage?

You better believe it. You must provide notice (oral or written—but, as with anything, written with a signed receipt is best) to your tipped employees of all of the following:
  1. The amount of cash wage you are paying.
  2. The additional amount you claim as a tip credit.
  3. A statement that the tip credit cannot exceed the amount of tips actually received by the tipped employee.
  4. A statement 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.
  5. A statement that the tip credit will not apply to any tipped employee unless you have specifically informed the employee of these tip credit provisions.
If you fail to provide this notice, you cannot use the tip credit. As a result, you will have to pay the tipped employee at least full minimum wage. Bonus penalty: you must also allow the tipped employee to keep all the tips received.

You mentioned a “tip pool”? What is that?

A tip pool is a sharing arrangement between employees who customarily and regularly receive tips. As noted above, the requirement that an employee must retain all tips does not preclude this tip pooling arrangement. 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.

What happens if an employee works two (or more) jobs for the same employer? Can we still claim a tip credit for all hours worked? 

The DOL explains this way better than I can: “When an employee is employed by one employer in both a tipped and a non-tipped occupation, such as an employee employed both as a maintenance person and a waitperson, the tip credit is available only for the hours spent by the employee in the tipped occupation. The FLSA permits an employer to take the tip credit for some time that the tipped employee spends in duties related to the tipped occupation, even though such duties are not by themselves directed toward producing tips. For example, a waitperson who spends some time cleaning and setting tables, making coffee, and occasionally washing dishes or glasses is considered to be engaged in a tipped occupation even though these duties are not tip producing. However, where a tipped employee spends a substantial amount of time (in excess of 20 percent in the workweek) performing related duties, no tip credit may be taken for the time spent in such duties.”

Thus, the Disney case will hinge on whether the employee spent a “substantial amount of time” performing non-tipped-related job duties. If she did, then Disney likely took an illegal tip credit for the time she spent performing non-tipped work. If, on the other hand, her non-tipped work was merely ancillary to her performance of tipped work, then Disney likely paid her legally.

There you have it. Everything you ever wanted to know about tip credits and tip pools in under 900 words.