Can Employers Pay Tipped Workers Less Than Minimum Wage?

Check federal and state requirements first

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This is the third in a series of articles about exceptions to the Fair Labor Standards Act's minimum wage rule. This article discusses wages for tipped workers. Read the first article here and the second article here.

 

T

he Fair Labor Standards Act (FLSA) allows employers to pay workers who customarily receive tips less than the standard minimum wage as long as certain conditions are met—but the rule's applicability has been diminished by state laws that set higher minimum wages or ban subminimum wages altogether.

Under federal law, employers can take a tip credit by paying tipped workers, such as servers and bartenders, as low as $2.13 an hour if those workers earn at least the standard minimum wage of $7.25 an hour once their tips are added in.  

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"The tip-credit wage recognizes that there are categories of employees who make a significant part of their income through tips received from customers," said Liz Washko, an attorney with Ogletree Deakins in Nashville. Restaurants and other business with tipped employees often operate on thin profit margins, and paying tip-credit wages enables many of these businesses to stay in operation and turn a profit, she noted.

But employers must check the applicable state laws before taking a tip credit, said Libby Henninger, an attorney with Littler in Washington, D.C. Some states don't allow a tip credit to be taken at all: Alaska, California, Minnesota, Montana, Nevada, Oregon and Washington. This means employers must pay servers in Alaska, for example, at least $9.84 an hour (the state's minimum wage).

Several other states permit a tip credit but require that workers be paid a higher cash wage than what is required under federal law. For example, in Arizona, employers must pay tipped workers at least $7.50 an hour, and workers must earn at least $10.50 an hour (the state's minimum wage) when tips are included.

If a tip credit is taken in states with a higher minimum wage, employers must ensure that employees are receiving sufficient tips to meet both federal and state minimum wage requirements, Henninger noted.

"Where the state law provides more generous protections for employees than federal law, the state law prevails," Washko said. "So state law differences on this issue can pose a challenge for employers who operate in multiple jurisdictions."

Background

Until 1966, tipped workers were subject to the same minimum-wage obligations under the FLSA as all other employees. "The policy of paying tipped workers a subminimum wage was first enacted in 1966 with the idea that expected income from tips can be converted into a tip credit against minimum-wage obligations for employers," Henninger said. 

Until 1996, the tipped wage rate was set at 50 percent of the standard minimum wage. In 1996, however, with significant pressure from President Bill Clinton, Congress agreed to increase the federal minimum wage with the condition that the tipped-employee minimum wage would freeze at $2.13 an hour, noted Tae Kim, an attorney with Barnes & Thornburg in Los Angeles. 

Under the FLSA, employers may pay this wage to workers who customarily receive more than $30 per month in tips. Before taking advantage of the tip credit, however, employers must tell affected workers:

  • The dollar amount the employer is paying tipped employees.
  • The additional amount claimed by the employer as a tip credit.
  • That the tip credit the employer is claiming can't exceed the actual amount of tips an employee receives.
  • That employees will retain all tips unless there is a valid tip pool that is limited to employees who customarily and regularly receive tips.

Tip Pooling

If employers take advantage of the FLSA's tip credit and pay less than the standard minimum wage to tipped workers, employers can't require workers to share gratuities with back-of-the-house employees, such as cooks and dishwashers. Furthermore, employers must:

  • Notify tipped workers of any required tip pool contribution amount.
  • Take a tip credit only for an amount equal to the tips each tipped employee actually receives.
  • Not retain any tips for any other purpose.

In 2011, during President Barack Obama's administration, the Department of Labor (DOL) issued a rule prohibiting employers from including back-of-the-house workers in tip pools, even if employers pay the full minimum wage. But that rule has recently been changed.

In December 2017, President Donald Trump's administration issued a proposed rule to rescind the Obama DOL's position and make it clear that employers may include back-of-the-house workers in tip pools if they pay the full minimum wage—but the proposal controversially left it open for employers to keep tips.

Shortly thereafter, Congress amended the FLSA to say that all tips must go to workers, and a DOL field bulletin clarified that the amendment nullifies the 2011 regulations and that employers who don't take the tip credit may include back-of-the-house workers in tip pools.

Despite the new FLSA rule, some states statutorily prohibit tip sharing with nontipped employees, so such a practice will still be prohibited, Henninger noted.

What's Next?

"I don't see changes in the immediate future to the FLSA's tipped minimum wages given the enormous resistance to any increase in tipped-employee minimum wages and a strong lobby," Kim said. "Immediate changes are more likely to happen on the state level."

At the end of 2017, for example, New York Governor Andrew Cuomo announced that he was considering a proposal to eliminate the tip credit.

Additionally, there has been a lot of discussion within the restaurant industry about eliminating tipping altogether—and thus, the tip credit—for front-of-the-house employees, Washko noted. "Several well-known restaurants have done this on an experimental basis, with mixed results."

 

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