Tipped Employees - Compliance Tips

By Lesley Pate Marlin Attorney, Venable LLP | February 12, 2012

Litigation under the Fair Labor Standards Act ("FLSA") has long been a favorite of plaintiffs' employment attorneys. Claims under the FLSA are expensive and difficult for employers to defend and offer plaintiffs and their attorneys the possibility of attorneys' fees as well as the potential for significant liquidated damages. Claimed attorneys' fees often significantly exceed the damages awarded to employees. One area of the Fair Labor Standards Act which is seen increased litigation recently is claims by tipped employees.

Under the FLSA, when an employee customarily and regularly receives more than $30 per month in tips, the employer may take a tip credit toward the employee's minimum wage. The current federal minimum wage is $7.25. The maximum tip credit an employer can currently claim toward satisfying its minimum wage obligations under the FLSA is $5.12 per hour. Many states have separate minimum wage standards under which the allowable tip credit which an employer may claim is different than under federal law. For example, some states such as Alaska, California, and Minnesota do not allow an employer to take any tip credit. Other states, such as Arizona, Colorado and Maryland allow tip credits but at a lower rate than under federal law. The penalties under state laws for failure to meet minimum wage obligations can be even more onerous than those under the FLSA.

Tip Credit Does Not Increase for Overtime Hours

Unlike the hourly wage that must be paid to non-exempt employees (including tipped employees), the tip credit does not increase for overtime hours. Thus, under the FLSA, an employer may not take a larger tip credit for an overtime hour than for a straight time hour and the employer may not increase the tip credit claimed for overtime hours by time and a half. For example, if the employer was claiming a $5.12 tip credit for straight time hours, the employer could not claim a $7.68 tip credit for overtime hours. This is true even if an employer claims a tip credit lower than the maximum allowable for non-overtime hours (such as $3.41 per hour), the employer cannot increase the tipped credit claimed for overtime hours to the maximum allowable tip credit ($5.12 per hour).

Employees Should Be Informed That the Employer Is Taking The Tip Credit

To take advantage of a tip credit, the FLSA requires that employees be aware of the credit being taken. Although the law does not dictate a precise form of notification, the failure to document that employees are aware of the credit being taken can lead to litigation. The Department of Labor, for example, has recently published new rules providing an employer must furnish the following information to a tipped employee in order to take advantage of the tip credit:

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