The Roller Coaster Ride Surrounding the Tip Credit

by Susan Eisenberg3 Min Read

Restaurant patrons customarily tip, which is why restaurants often pay tip-eligible employees less than the federally mandated minimum hourly wage, currently $7.25.

How tips are handled is one of the more complex areas of restaurant compliance, and restaurants face unique challenges as a result. Restaurants are required by law to pay taxes on tips employees receive because they are defined as income under the Federal Insurance Contributions Act (FICA). The Fair Labor Standards Act (FLSA), however, allows restaurants to take a “tip credit,” which is what allows them to pay eligible less than the federally mandated minimum. With the tip credit, an employer can pay tipped employees less than $7.25 and use the tips to cover the difference.

A clear understanding of the rules surrounding the tip credit is crucial for restaurant employers because the consequences of violating them are dire. Restaurants that do not follow the tip credit rules lose the tip credit and must pay the affected employees minimum wage.

How the Tip Credit Works

To take the credit lawfully, restaurants must follow very specific rules. In general, a “tipped employee” is any employee engaged in an occupation in which he customarily and regularly receives more than $30 a month in tips. If the employee performs “dual jobs”, that is one which is a traditionally tipped position and another which is not, the employer may only take a tip credit for the hours the employee works in the tipped position. Also important, is the requirement that employee provide a tipped employee with notice of the tip credit before an employer takes a tip credit. That notice must include information regarding: 1) the amount of the cash wage paid; and 2) the amount of the tip credit taken by the employer. In addition, the notice must inform the employee that all tips received must be retained by the employee except where there is a valid tip pool.

Note: An employer should never require employees who are customarily and regularly tipped to share tips with management or supervisors.

When Employers Opt Out of the Tip Credit

The rules were well defined until some employers with tipped employees decided not to take the tip credit. In other words, they were paying their tipped employees $7.25 or more an hour. Those employers took the position that the FLSA did not control the tips as long as they were paying employees at least minimum wage. Thus, the employer could require tipped employees to share tips with those employees who are not regularly tipped or even keep the tips themselves. In 2011, however, the Department of Labor under the Obama administration issued a regulation that prevented employers from touching the tips, whether or not the employer took the tip credit. The DOL took the position that the employer could never take or make the employee share the tips. The issue of whether the FLSA controlled tips where the employer did not take a tip credit went through the court system, and there was a split of authority as to whether the Department of Labor actually had any authority over the tips where the employer did not take the tip credit.

The Ongoing Evolution of Tips

As this issue was winding its way through the court system, the Trump administration's DOL rescinded the 2011 regulation and said that if the employer were not taking the tip credit, the DOL had no control over the tips, and the employer was, therefore, free to do whatever it wanted with them. Then, on March 23, 2018 in a surprise move, the Fair Labor Standards Act (FLSA) was amended through President Trump’s spending bill. Trump signed the Consolidated Appropriations Act, which includes a clause that amends the part of the FLSA that deals with tips. The amendment to the statute provides that the employer may not keep tips received by employees for any purpose regardless of whether the employer takes the tip credit. Now, whether or not the employer takes the tip credit, the tips belong to the employees.

Here's the change: If the employer pays minimum wage or more, it can have the employee share the tips with non-tipped employees, such as dishwashers and cooks. This change really helps bridge the gap in the pay between front- and back-of-the-house employees.

To be clear, in the situations where the employer does not take the tip credit, it still cannot assert any control over the tips; but the amendment expands the type of positions with which the employer can require the tipped employee to share those tips. And because this was done by amending the FLSA, it is now the law, regardless of the DOL’s position.

Of course, there will still be litigation regarding who is in the tip pool where the employer does take the tip credit. Some things never change.

Susan Eisenberg

@zenonnor | LinkedIn | Website

Susan Eisenberg is a member of Cozen O'Connor's Labor & Employment Department.

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