Navigating Tip-Credit Rules: Two Conflicting Approaches

Date: September 28, 2017

Related Content: Legal - Compliance Labor

While the Fair Labor Standards Act requires that non-exempt employees must be paid at least minimum wage, federal law allows employers to satisfy this obligation for “tipped employees” partially by counting earned tips as a “credit.” The U.S. Department of Labor explains here that “[t]ipped employees are those who customarily and regularly receive more than $30 per month in tips.” Here is a break-down of what you need to know:

The Tip Credit Rule

Under the FLSA employers are required to pay “tipped employees” a nominal wage of $2.13 per hour—regardless of how much the employee makes in tips. But that is insufficient to satisfy minimum wage obligations in the absence of tips. For that matter, the minimum wage requirement is satisfied only if the employee earns enough in tips to cover the difference between the wage the employer has paid and the federal minimum wage (currently $7.25 per hour). In other words, employers may claim a credit of up to $5.12 per hour from earned tips.

Yet as DOL explains, “the tip credit claimed by the employer cannot exceed the amount of tips actually received by the tipped employee.” This means that if a tipped employee does not make enough in tips, the employer must pay more in base wages. For example, if Suzy earns only $4.00 per hour in tips, then her employer would have to pay her a base wage of $3.25 for that pay period to ensure that she receives minimum wage. But if she makes $12.00 per hour in tips then the employer need only pay a base wage of $2.13.

Here are a few additional notes:

• Tips are deemed exclusively property of the tipped employee.
• Employers must provide advance notice before counting employees’ tips as a credit toward minimum wage.
• A compulsory service charge is not a tip and cannot be counted as part of employees’ tip credit.
• Customarily tipped employees may pool their tips together and distribute equally, so long as there is advanced notice of the arrangement.

State Law Complications

If you are contemplating using a tip credit regime to satisfy your federal minimum wage obligation, you must also check to see whether these practices are allowed under state and local law. To illustrate the point, the Ninth Circuit Federal Court of Appeals recently handed-down an important decision on use of tip credits in Marsh v. J. Alexander’s LLC. Although the Ninth Circuit covers nine states across the west, the decision only affects employers in Arizona, Hawaii and Idaho because state laws in Alaska, California, Montana, Nevada, Oregon and Washington all prohibit use of wage tip credits. (Also, most of these jurisdictions impose higher minimum wage obligations—well beyond the FLSA’s $7.25 per hour.).

Dual Jobs or Separate Duties?

Even within those states allowing use of wage tip credits, employers should proceed with caution. Its advisable to consult with a trusted employment law attorney, especially if you ask tipped employees to perform duties that may be outside the scope of usual customer service that might generate tips. This is because, in at least some jurisdictions, courts are requiring employers to compensate employees separately for tasks likely to generate tips, and those that are unlikely to generate tips.

The Ninth Circuit’s recent decision in Marsh highlights a growing division in authority on this issue. In a rare showing the Ninth Circuit sided with employers, in rejecting an argument that they should be tracking (down to the minute) time their employees spend working on discrete tasks. Instead, the Ninth Circuit ruled that employers may continue to use wage tip credits unless the tipped employee is working two separate jobs—with some clear division of labor. As the attorneys at Littler explain in this enlightening post, employers “may assign some non-tip generating duties to tipped employees and still take the tip credit for the time spent on such activities… However, employers must make sure that tipped employees are primarily focusing their activities on customer service and activities that enhance customer service.”

This decision conflicts with a prior decision of the Eighth Circuit, which covers North and South Dakota, Minnesota, Iowa, Missouri and Arkansas. Businesses using wage tip credits in that part of the country should be especially careful because the Eigth Circuit disallows use of wage tip credits for tasks unlikely to generate tips if they amount to more than 20 percent of the employee’s time. Obviously that complicates matters a great deal.

In any event, we’ll continue to monitor this issue. In the interim, it is highly advisable to consult with a trusted employment law attorney about whether you are fully compliant with relevant state and federal laws. Elsewhere in the country, you should, absolutely, talk with your attorney about whether courts in your jurisdiction are more likely to side with the Ninth or the Eigth Circuit when it comes to tracking time spent for ancillary tasks that your tipped employees may perform.

Related Content: Legal - Compliance | Labor

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