Sarah Block & Rachel Lerner
Wed, 07/19/2023
Employees who make or rely on tips face unique wage issues in the workplace.
Under federal law and most state laws, employers may pay tipped employees less than the hourly minimum wage, as long as the employees receive enough in tips to make up the difference. This is called a “tip credit” or tipped minimum wage. The employer can only take a tip credit if the employee regularly earns more than $30 in tips per month. For example, under federal law, n employer of a tipped employee may take a tip credit of up to $5.12 per hour, whereby it is only required to pay $2.13 per hour in direct wages, so long as that amount combined with the tips received equals at least the federal minimum wage (currently at $7.25 per hour). The same calculation applies in states and localities where the minimum wage is higher than the federal minimum wage. In either scenario, if the total amount received from tips and the minimum direct wage does not equal the applicable minimum hourly wage, then the employer must make up the difference.
Seven states (Alaska, California, Minnesota, Montana, Nevada, Oregon, and Washington) do not allow tip credits at all. The tip credit will also be eliminated in the District of Columbia by 2027. This means that all employees, including those that regularly receive tips, must be paid the full state minimum wage.
Significantly, regardless of whether the employer takes a tip credit, an employer is not allowed to retain any of the employee’s tips. As such, both types of tipped workers – those who are paid at the tipped minimum wage and those who are not but nevertheless earn tips – are impacted by employers who take advantage of workers and fail to pay employees in accordance with the law by improperly distributing tips or by improperly calculating hourly or overtime compensation.
Improper Tip Pooling
Tip pooling is a form of tip distribution where tips are collected into a collective pool and then divided among employees. Tip pooling is generally permitted, but issues often arise regarding who can participate in the tip pools. There are different rules for tip pooling based on where the employees work, and on whether the employer takes a tip credit or whether the employees are paid at the full minimum wage.
However, regardless of the type of tip pool, managers and supervisors are not allowed to participate in the pool and split tips with tipped employees.
Tip Pooling – Tip Credit Employees
If employees are paid at the tipped minimum wage (i.e. the employer takes a tip credit), then tip pooling is only allowed between employees who customarily and regularly receive tips, such as waiters, bellhops, and counter personnel. Issues often arise in determining which employees “customarily and regularly receive tips.” The distinction generally comes down to whether an employee is working at the front of the house versus the back of the house. Therefore, even though a busser or a restaurant host may not generally generate tips in practice, they can properly be included in the tip pool because they are customer facing. However, servers and bartenders cannot properly share their own tips with a chef who stays in the kitchen and never interacts with customers.
Another common issue with tip pools for employees paid at the tipped minimum wage arises where restaurants and bars employ two types of bartenders, those that work at the bar making drinks for patrons sitting at the bar (service bartender) and those making drinks for people sitting at tables, being served by waiters. The service bartender serving patrons at the bar is customer-facing, and customarily and regularly receives tips. On the other hand, the bartender only making drinks that are taken to tables, who likely is not working at the regular bar where customers sit, may be considered a “back of the house” employee who does not regularly receive tips. In this scenario, the service bartender may participate in the tip pool, but the other bartender may not.
Tip Pooling – Non-Tip Credit Employees
When employees are paid the full minimum wage (i.e., not a tipped minimum wage), tip pools are allowed to include hourly employees who are not employed in positions which traditionally or regularly receive tips. For example, a non-traditional tip pool may require tipped employees, like servers, to share tips with non-tipped employees, like dishwashers and cooks, but only if all workers receive at least the full minimum wage. Of course, as noted above, a tip pool can never include supervisors and managers even if the employees are paid at the regular minimum wage rate.
Traditional restaurants and bars are not the only industries in which this type of tip pooling is an issue. Other service industries, such as coffee shops and cannabis dispensaries, often employ tip jars. These industries often also have the option to tip when customers pay with a debit or credit card. Because employees in these industries are more likely to be paid the full minimum wage, tip pools can include all employees except for supervisors and managers.
Service Charges
A new trend in the restaurant industry is including an automatic service charge onto a customer’s bill, which may affect the pay of service employees like banquet servers and other traditional restaurant employees. These service charges gained popularity during the COVID-19 pandemic and are still being used in many restaurants. Under the Fair Labor Standards Act, true service fees are not considered tips. Therefore, employers are permitted to use the service fee to offset the tipped minimum wage. This means, for example, that employers can pay tipped employees the base tipped rate of $2.13 per hour, and then use the service fees to cover the rest of the salary to get the employees up to the federal minimum wage. Because service fees are not tips, if a restaurant does this, the employees would not be considered tipped employees under the FLSA.
However, it is not always clear who the service charge is going to, or what the money is being used for. Many patrons may conflate a service charge with tips that go to their server, but that is not always true. In some states, like Massachusetts, service charges can only be distributed to wait staff employees, service employees, or service bartenders, in proportion to the services provided.
In other states, restaurants are allowed to use the service charge for general restaurant costs and do not necessarily have to distribute the service charge to the service employees. However, in these places, laws often require restaurants to clearly disclose where the funds are going. If employers do not comply with the rules regarding disclosure, the employer will not be able to use the service fee to make up the difference between the tipped and regular minimum wage.
Some states have specific disclosure requirements for service fees in order for restaurants to be able to use them. For example, in the District of Columbia, restaurants must clearly disclose service fees before customers order. However, there is no set way on how the restaurant must inform the customer about the fees, as long as the information is made available before ordering and describes what the fee is for. New York has a similar disclosure requirement for service fees.
Non-Tipped Work at the Tipped Wage Rate
Where an employer takes the tip credit and the employees are typically paid at the tipped minimum wage, issues often arise with respect to how those employees are paid to perform non-tipped work.
The Department of Labor has established a rule that limits the amount of time tipped employees can spend performing non-tip producing work and still be paid at the reduced tipped minimum wage. Specifically, the rule creates three “buckets” of work performed by tipped employees and disallows the tip credit depending on the bucket in which the work falls.
The first bucket is work that is classified as “tip-producing work.” An employee engaged in this work can be paid at the tipped hourly rate without any limitation. This bucket of work includes tasks such as taking orders, serving food, and preparing drinks.
The second bucket is “work that is not part of the tipped occupation.” This bucket includes work that is unrelated to the tipped work, such as where a restaurant server cleans bathrooms, moves furniture, or sweeps the parking lot. This would also include time spent in mandatory pre-shift meetings when the business is otherwise closed to customers. An employer may not use the tip credit (meaning, it cannot pay employees at the tipped minimum wage) for any time spent performing these tasks.
The third bucket is work that is not tip-producing itself, but that is “directly supporting” tip-producing work. If an employee spends a substantial amount of time performing this type of work, then the employer is not allowed to take the tip credit for the time spent on those tasks. A substantial amount of time means more than 20% of the hours in the workweek for which the employer has taken the tip credit, or a continuous period of time that is more than 30 minutes. Examples of work that is performed in preparation of or otherwise assists the tip-producing work includes: rolling silverware, setting tables, sweeping or vacuuming the dining area, slicing and pitting fruit for drinks, arranging bottles in the bar, and setting up and stocking the busser station. If the employee spends a substantial amount of time performing these types of tasks, the employer must pay the employee the full minimum wage for the time spent on these duties.
Calculation of Overtime
When employees earning the tipped minimum wage work in excess of 40 hours in a week, employers often miscalculate the overtime rate of pay. The general rule is that employees who work for an employer for more than 40 hours in a week must be paid at one and one-half time the regular rate of pay for all hours worked over 40. For tipped wage employees, the calculation is not quite as simple creating pitfalls for employers and resulting in chronically underpaid employees.
Employers often use the incorrect regular rate of pay to calculate overtime pay. A common mistake is to use the tipped minimum wage (under the FLSA, $2.13) as the regular rate of pay which gets multiplied by time and one half to determine the overtime rate of pay. Using the federal minimum wage as an example, this results in an overtime rate of pay of $3.20 ($2.13 x 1.5). However, the tipped overtime rate is actually one and one-half times the full minimum wage, minus the tip credit. For example, calculating the correct tipped overtime rate under federal law requires the following calculation: the federal minimum wage times 1.5 ($7.25 x 1.5) is $10.88. Subtracting the tip credit, which is $5.12, from this amount provides an overtime rate of pay of $5.76, which is significantly higher than $3.20. Therefore, this miscalculation of the overtime rate of pay can have large financial consequences for tipped employees who work overtime.
Unlawful Deductions
Sometimes, an employer will require employees paid at the minimum wage rate or the tipped wage rate to purchase certain tools or equipment that are primarily for the benefit of the employer, such as uniforms, pens, or bicycles. A minimum wage employee cannot be required to purchase mandatory tools of the trade and uniforms out of their minimum wages. If an employee is paid at the minimum wage and is also required to purchase tools or equipment required for the job, it is as if the employer paid them less than the minimum wage rate (because the costs of the items are counted against the pay), which is a violation of the FLSA.
We are here to help!
McGillivary Steele Elkin has represented service industry employees nationwide in a variety of tip cases. For example, in 2019, McGillivary Steele Elkin LLP recovered an average of over $4,000 per server and bartender who worked for Founding Farmers restaurants as a result of wage violations including an unlawful tip pool and taking the tip credit for substantial non-tipped work. More recently, MSE represented servers and bartenders in a lawsuit against Sequoia alleging violations including failure to pay for substantial non-tipped work including moving furniture and setting up for events when the restaurant was closed. MSE also represents delivery drivers for a counter-serve burger chain in New York City who were improperly paid at the tipped minimum wage.
If you believe your employer is violating your rights regarding one of these tip issues, please contact us at info@mselaborlaw.com
