On Minimum Wage and Tips
Question: I run two small, but successful restaurants. While business has been good, costs are high, so margins are always tight. We are always looking for ways to lower our expenses. We pay the hourly staff minimum wage, but they often make much more than that after tips. May we change our hourly rate to below minimum wage since the tips often bring them over that threshold?
Answer: The short answer to your question is, yes. You may pay your food-service workers a cash wage below the hourly minimum wage provided that, with tips, the employees earn at or above minimum wage. An explanation of the tipped credit system and its requirements is useful to understand just what your obligations are in this regard.
The Federal Tipped Minimum Wage System
Under the Fair Labor Standards Act, the federal government utilizes a tipped credit system for employers who have "tipped employees," that is, employees who regularly make more than $30 per month in tips. This means that, so long as employees regularly earn more than $30 per month in tips, under federal law employers may pay their food service workers less than the required minimum wage, so long as the amount the employees receive in tips makes up the difference between the standard hourly minimum wage and the "tipped minimum wage."
The regular, hourly federal minimum wage is currently $7.25. (Please note that several states require a higher minimum wage.) Under the FLSA, however, employers may pay their food service employees a $2.13 cash hourly wage (this is called the "tipped minimum wage") provided that they will receive another $5.12 an hour in tips. This $5.12 is referred to as the "tip credit."
So, consider the following example for a restaurant employer paying its food service employees minimum wage using the tip credit: The restaurant pays its food service employees $2.13 per hour with the expectation that their tips will bring them to (or exceed) the statutory minimum wage of $7.25. Imagine this restaurant has a slow day and the tips generated are only enough for each employee to receive an additional $1.67 per hour. On top of the $2.13 cash wage the employees regularly receive, with this $1.67, their total hourly wage for that day is $3.80. This amount is $3.45 short of satisfying the $7.25 federal hourly minimum wage. Accordingly, the employer must make up that difference and pay the employee the additional $3.45 an hour for that day's work in order to bring the employees up to $7.25 per hour under federal law. Alternatively, consider a tipped employee who takes home approximately $15 an hour every day. This employer may still pay the employee a cash wage of $2.13, with any additional amounts (up to and beyond the minimum wage) being paid in tips.
The above examples illustrate the basic concept behind the tip credit and the tipped minimum wage, but there are a few other things to keep in mind. For one, employers should remember that, after 40 hours, food service employees are entitled to overtime at a rate of one and one-half times their regular hourly wage. That means a minimum wage earner should make $10.88 (one and a half times $7.25) for hours worked beyond 40 in a week. The tip credit of $5.12 under the FLSA remains the same, whether it is applied to regular time or overtime hourly wages. Thus, after 40 hours an employer may pay its food service workers a tipped minimum wage of $5.76 per hour, so long as the additional $5.12 necessary to bring the total up to $10.88 is generated through tips paid by customers, or by the employer bridging the gap.
Under the FLSA (see U.S. Department of Labor, Wage and Hour Division, Fact Sheet #15), the employer must also provide oral or written notice of the following prior to taking a tip credit for tipped employees:
1) the amount of cash wage the employer is paying a tipped employee, which must be at least $2.13 per hour;
2) the additional amount claimed by the employer as a tip credit, which cannot exceed $5.12 (the difference between the minimum required cash wage of $2.13 and the current minimum wage of $7.25);
3) that the tip credit claimed by the employer cannot exceed the amount of tips actually received by the tipped employee;
4) 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; and
5) that the tip credit will not apply to any tipped employee unless the employee has been informed of these tip credit provisions.
An employer's failure to provide notice of the above before implementing a tip credit system will prohibit the employer from using the tip credit system. Furthermore, under federal law, an employer using the tip credit system must be able to show regulators that tipped employees are receiving the federal minimum wage of $7.25, one way or another, or risk penalties.
Tipped Minimum Wage Requirements Under State or Local Law
The tipped minimum wage system is not exclusive to federal law. For instance, some state and local laws address the use of the tipped minimum wage and provide employees with greater benefits and protections than federal law. In New York, for example, the minimum hourly wage is currently $8.75, but employers in New York may pay their food service employees a $5.00 hourly wage (this is called the "tipped minimum wage") provided that the employees receive another $3.75 an hour in tips. Accordingly, $3.75 is the tip credit in New York.
New York restaurant employers should also be aware that they must provide written notice to employees that they are using the tipped minimum wage system. The written notice (under the FLSA, the notice may be written or verbal) must contain, among other information, the employees' rate or rates of pay, including overtime rate of pay (if it applies); how the employees' are paid (by the hour, shift, day, week, commission, etc.); and the employees' regular payday.
New York restaurant employers should also be aware that, with limited exceptions, they must pay out the entirety of tips to the workers whose service is being tipped and not withhold any amount for management. One exception to this rule applies when tips are paid via credit card, in which case employers may withhold from tipped employees the pro rata amount of a credit card service charge.
While many states and the federal government have adopted a tipped minimum wage system, some states and municipalities have yet to do so. For example, Los Angeles, which recently passed one of the most generous minimum wage laws in the country (raising the minimum wage to $15.00 per hour by 2020), does not have a tipped minimum wage/credit system in place. Neither does the California State Labor Code. Indeed, a statewide tipped credit system was recently proposed, but was not passed. Accordingly, California employers in the food service industry must pay their employees the full amount of tips as well as meet the statewide minimum wage of $8.00 an hour, without taking any tip credit.
Because of the numerous state and local laws on this issue, employers in all jurisdictions with tipped employees should be aware of the FLSA's tip credit system and any state or municipal laws that pertain to tip credits.
Evandro C. Gigante is a senior counsel in Proskauer's labor and employment department and resident in the firm's New York office. Proskauer Associate Matthew R. Engel, resident in Proskauer's Newark office, assisted with this article.