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Fair Labor Standards ActFebruary 12, 2019by Stanton LawNavigating the FLSA Tip Credit: Part 1 – An Introduction

by Amy Thomson.

Navigating the FLSA Tip Credit: Who and What Qualifies, Valid Tip Pools, and Other Things You Need to Know

The Fair Labor Standards Act (FLSA) allows employers to satisfy their minimum wage obligations to tipped employees by paying them a reduced cash wage and treating their tips as a credit toward the remainder owed. Sounds simple enough, right? Wrong. That’s why we’ll be discussing this topic in-depth over the course of several blog posts, starting with this one.

Employers get into trouble when they don’t understand:

  • What is the tip credit?
  • Who qualifies as a tipped employee?
  • What qualifies as a tip?
  • If they should use tip pools and, if so, what makes a tip pool valid?

Not knowing the answers to these questions can be extremely costly to employers. The loss of the tip credit can result in damages that include paying the remainder of the minimum hourly wage that would have been paid to the employee had the employer not taken the tip credit, and, in some instances, paying the tips the employee earned anyway plus that remainder. It’s better to know what you need to do up front or to change your current processes to ensure that you’re compliant with the FLSA before you’re hit with a wage and hour claim.

The FLSA Tip Credit

The FLSA gives employers the option of paying tipped employees a reduced hourly cash or direct wage if the cash wage plus tips satisfies the federal minimum wage requirement. The tip credit is the amount of an employee’s tips that an employer is permitted to apply toward their minimum wage obligations. Currently, the FLSA’s maximum allowable tip credit is $5.12 per hour, which is the difference between:

  • The minimum wage (currently $7.25 per hour) and
  • The cash wage (currently $2.13 per hour)

Employers must pay tipped employees at least $2.13 per hour in cash or direct wages. They may take a tip credit of up to $5.12 per hour but not more. In addition, the overtime rate on the tip credit is $10.88 per hour. The tip credit can’t exceed the actual amount of tips received by an employee. If an employee’s actual tips plus their cash or direct wages is less than the applicable minimum wage, then the employer must make up the difference with additional cash or direct wages.

Employers must allow tipped employees to retain all tips. However, one exception is when employers require tipped employees to participate in a valid tip pool. (We’ll discuss tip pools in a future article.) Employers, including managers and supervisors, are prohibited by the FLSA from retaining any portion of employee tips. It’s important to note that the terms “manager” and “supervisor” are not defined by the FLSA. The federal courts and the U.S. Department of Labor (DOL) consider several factors in reviewing an employee’s actual duties to determine whether they are an employer, supervisor, or manager. Therefore, even if an employee does not have “manager” or “supervisor” in their job title, they could still be considered a manager or supervisor for FLSA purposes. If you have questions about whether one of your employees qualifies as a “manager” or “supervisor” for FLSA purposes, please contact the Atlanta employment law attorneys at Stanton Law.

Tip Credit Notice Requirements

An employer must provide all of the following information to a tipped employee before using the FLSA tip credit:

  • The amount of cash wage the employer is paying a tipped employee (at least $2.13 per hour)
  • The additional amount claimed by the employer as a tip credit (not to exceed $5.12 per hour)
  • That the tip credit claimed by the employer cannot exceed the amounts of tips 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)
  • That the tip credit will not apply to any tipped employee unless the employee has been informed of these tip credit provisions

Employers may communicate these requirements to the tipped employee verbally or in writing, although we strongly recommend you do so in writing. We also recommend that you have the employee sign an acknowledgement that they have received and understand the information.

State or local law controls if it imposes a higher minimum wage or prohibits tip credits. The information discussed in this article is specific to tip credit in Georgia. If you have questions about tip credit in other states, please speak with a qualified employment attorney.

Don’t Let Your FLSA Questions Go Unanswered

The experienced Georgia employment law attorneys at Stanton Law are here to make sure you’re in compliance and that your questions are answered. When employers don’t follow the rules when it comes to tips, FLSA claims can be very costly. Take a minute to resolve your questions before they become expensive problems. Don’t hesitate to reach out to Stanton Law attorney Amy Thomson at 404-531-2341.