What Is a Tip?
A tip is monetary value given by a customer in recognition of good service rendered by employees in retail and service establishments. It is not the same as a service charge because a service charge is a contractual obligation between the retail and service establishment and the customer. The service charge goes to the employer and not to the employees.
Who is a tipped employee and why does this matter?
Not all employees in a retail or service establishment gets tips. In a retail or service establishment such as a restaurant, front end employees like waiters, waitresses, and other food servers get tips. However, cooks, dishwashers, managers and supervisors do not usually get a tip as they work in the back-end and do not have direct contact with customers. For this reason, workers in retail or service establishments are either “tipped employees” or “untipped employees.” Under the Fair Labor Standards Act (FLSA), a person is considered a tipped employee if he or she receives more than $30 in tips each month.
It matters because some employers do not pay their front-end employees cash wages that conform to minimum wage. The tips are all that the front-end employees earn. So, if the employees are assigned to a shift where there aren’t very many customers, then they won’t earn even minimum wage. It also matters because employers often take the tips received by all the employees, pool them and distribute them to all the employees. This practice isn’t so bad if the employer pools the tips and pays them to the employees on top of the minimum wage. Some employers, however, do not pay their employees minimum wage and they also pool the tips and use that to pay the “untipped employees.” Some employers may pay their staff minimum wage, and allow them to keep their tips but the employees are charged for broken dishes or for customers who eat without paying.
To stop these practices, the Department of Labor (DOL) has declared that tips are the sole property of the tipped employee. Tips are given because of excellent personal service rendered, after all. The DOL under the Obama administration has strictly regulated the practices of tip pooling as well as tip crediting.
What are legal tip pools and tip credits?
The FLSA allows employers to require tipped employees to contribute to a tip pool which is divided among employees who regularly receive tips. However, the employer or non-tipped employees cannot share in the tip pools – tip pools have been restricted to tipped employees only since 2011. Employers may require employees to pool their tips only when their earnings do not go below minimum wage.
Both the FLSA and the Florida Minimum Wage Act (FMWA) allow employers to impose tip credits. In Florida, the minimum wage per hour is $8.10. The employer is required to pay its employees this minimum wage. But employers can pay tipped employees as low as $5.08 per hour and the remaining $3.02 is credited against the tips received by the tipped employee. For the tip credit to be legal, the tip earnings received by the employee must be sufficient to pay the employee at least minimum wage.
A problem arises when the tipped employee does not receive enough tips to earn minimum wage. When employees do not receive enough tips to earn at least minimum wage, the employer is required to make up the difference and pay the tipped employee minimum wage. Tip or no tip, an employee cannot be paid less than minimum wage. The tip pool and tip credit arrangement cannot work to deprive a tipped employee of minimum wage entitlement or of the tips earned that are over and above minimum wage. The tips belong to the tipped employee.
What issues present problems for calculating the wages of tipped employees?
First, some customers tip employees using their credit cards instead of leaving cash. The customer pays for a service or for goods through a credit/debit card and allows the restaurant owner to include an amount representing a tip to be added to the charge for the goods or services. The employer pays the credit/debit card company a service fee for processing payments made through credit/debit cards. So, the employer can charge the credit/debit card service or processing fee against the tip. For example, if the employer pays 3% processing fee for a credit card transaction, the employer is entitled to deduct the processing fee from the tip that was given through a credit card charge. So, if the customer gives the tipped employee a $10 tip, the employer will deduct $0.03 for the credit card processing fee from the tip.
Second, some tipped employees have other duties or other work besides the tipped work. Some waitresses, for instance, clean up before closing time, decorate the restaurant for special functions or holidays, do inventory work or check deliveries. This type of work is not tipped work. The employer can use the tip credit for untipped work that does not exceed 20% of the shift. For untipped work required by the employer exceeding 20% of the shift, the employer cannot charge a tip credit on the employee’s tips. This is an exception to the use by the employer of the tip credit. This means that tipped employees who are paid tip credits can only do 12 minutes of untipped work for every hour worked. If the employee is required to render untipped work beyond 12 minutes for every hour worked, the employer must pay them full minimum wage – the employer cannot impose the tip credit for untipped work rendered beyond 20% of their shift.
Third, when pooling tips, employers must inform tipped employees of the mechanics of the tip pool and present them with a calculation of their wages before imposing the tip pool arrangement. Employers cannot participate in the tip pool (there can be no tips given to the employer or for the “house”). Employees who do not customarily receive tips cannot participate in the tip pool (they have no tips to contribute so they cannot receive shares in the tip pool). Lastly, employees cannot be forced to give up all their earned tips into the tip pool. They can be required to contribute a share (about 15%), but not all their tips.
Fourth, problems arise when an employer imposes both a tip pool arrangement and a tip credit but the employees’ earned tips do not even equal minimum wage. Whatever arrangement is made for tips, the employee cannot be paid less than minimum wage. The tip credit cannot be imposed if the employee did not earn enough tips for him to be paid minimum wage. When this happens, the employer must pay the difference. If the tips earned are sufficient to pay the tip credit and the employee earns only a minimum wage, the employee cannot be forced to contribute to the tip pool. By forcing employees to contribute to a tip pool, the employer must pay the employees sufficient minimum wage.
Fifth, when employees render overtime work, their overtime pay must conform to the time and a half rule. The tip credit can be applied to the overtime work rendered, but what is not allowed is for employers to calculate overtime pay based on the reduced wage rate of $5.08 only. In Florida, since minimum wage is $8.10, time and a half for overtime work comes to about $12.15. The tip credit of $3.02 can be charged against time and a half.
Sixth, employees can voluntarily decide to share their tips with co-workers. They can use it to pay their 401(k) retirement plan. They can even ask their employer to withhold taxes from their tips.
By restricting the practice of tip pools and tip credits, the Department of Labor has stopped employers from taking their employees’ tips and using them to pay their minimum wage. The DOL also stopped employers from taking their employees’ tips and sharing the tips with other staff who are not paid in tips.
The 2011 DOL regulations stopped employers from underpaying the staff who do not have direct access to customers (the workers in the back) and using the tips from employees in the front to make up the underpayment to the staff in the back. In sum, if the DOL did not restrict the tip pool and tip credit, frontline employees would end up paying for the wages of back-end employees and employers would not have to pay them their full salaries. The DOL protected tipped employees by making tips the property of employees.
A case before the US Supreme Court (Cumbie v. Woody Woo) has questioned the authority of the Department of Labor to restrict the practice of tip pooling and tip crediting. If the Supreme Court strikes down the regulations issued by the DOL in 2011, employers may require employees to pool all the tips they receive and share them with staff in the back.
Some restaurant owners impose tip pool arrangements that share tips with all staff. They argue that it is unfair not to share tips with the employees in the back end of the operation because their work contributes to customer satisfaction. They note that a food server will not be given a tip for good service if the food served isn’t delicious. And yet, the customer will only give a tip to the food server even if the customer’s satisfaction was caused in part by the good food prepared by the staff in the back as well as the good service by the staff up front. By pooling tips, the work of the staff in the back will be recognized, acknowledged, and rewarded as well.
How can all this change?
The Supreme Court’s decision in the Cumbie v. Woody Woo case is expected soon, but it may not come soon enough. The Department of Labor under the Trump administration has proposed changes that may come in the next couple of months. The tip pooling restrictions are most controversial and this will probably be the focus of the coming changes.
The Trump administration has filed its intent to propose new regulations that will rescind the restrictions BUT only for employers who do not use the tip credit and instead pay their employees their full minimum wage. Employers who pay directly to their employees the full minimum wage of $8.10 may be freed from the 2011 restrictions on tip pooling.
The changes might mean that the employer can still decide to pool tips received by its tipped employees, or the employer can require employees to contribute to a pool that will be shared with untipped employees. It might mean that employers who pay their employee minimum wage can require their employees to contribute to the tip pool a percentage that is greater than 15%.
How will the changes affect me?
For now, the 2011 restrictions still hold. The Trump administration has declared its intentions to rescind the restrictions but it is not yet clear how the rules will change. One thing is certain, the Fair Labor Standards Act prohibits employers from retaining any portion of the tips. This means that employers cannot get a share in the tip pool. Managers and supervisors are representatives of the employer, so they cannot participate in the tip pool, either. It might mean that employees who do not regularly get tips can get shares in the tip pool. The basic rule is, the employee owns the tips and whatever tip pool arrangement the employer wants to impose must be fully disclosed to the employees prior to implementing the arrangement.
If you have questions, or you feel that your right to retain the tips you receive from your customers has been violated, feel free to contact us for a confidential consultation with one of our employment attorneys.