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HOTEL BUSINESS REVIEW

DECEMBER FOCUS: Hotel Law

 

Provide Tipped Employees with Adequate Written Notice

By Luis J. Gonzalez Attorney Litigation Practice & Alcohol Beverage Team, Holland & Knight | December 2016

Complying with the Fair Labor Standards Act (FLSA) and the Department of Labor's (DOL) regulations for tipped employees continues to present challenges for hoteliers and others in the hospitality industry. While recent attention has been paid to proper tip pooling practices (employers requiring certain tipped employees to chip in a portion of their tips, which are then divided among a group of employees), equal attention must be given to the FLSA's mandatory notice provision to tipped employees.

A continuing trend in wage and hour lawsuits stems from the employer's failure to give the tipped employee the required notice. When such a failure occurs, the employer may be liable for back pay, liquidated damages, and the employee's attorneys' fees and costs.

Who Are Tipped Employees Under the FLSA?

Under the FLSA, a "tipped employee" is one who is engaged in an occupation in which he or she customarily and regularly receives more than $30 per month in tips. Tipped employees typically include waiters, waitresses, bellhops, counter personnel (who serve customers), bussers, and bartenders. Tipped employees must be paid the required minimum wage - in addition to any tips earned - even if the employee's weekly tips alone, when divided by the number of hours worked, exceed the required minimum wage.

The minimum wage varies by state and cannot be less than the federal minimum wage. It is important to note that under the current DOL regulation, an employer is prohibited from using an employee's earned tips for any reason - with a few exceptions. Therefore, where a tipped employee receives the federal minimum wage of $7.25 per hour from the employer plus tips, the employer cannot require the employee to turn over the tips to the employer. (The application of this restriction has been called into question by various courts interpreting the FLSA.)

Exceptions to FLSA Requirement That Tipped Employees Keep All Tips

There are several exceptions to the requirement that tipped employees keep all tips earned. The first exception is when the employer has a valid tip pooling or sharing arrangement among employees who customarily and regularly receive tips. As mentioned above, a tip pool is a mechanism by which tipped employees who are subject to the pool contribute a portion of their tips, which are then divided among a group of employees. Typically, tip pools are established to allocate collected tips between servers, bussers, food runners, and bartenders, but tip pools can also be found in other occupations, such as valet parking attendants. The FLSA does not impose a maximum contribution amount or percentage on valid mandatory tip pools, but employers may not retain any portion of the tip pool for any other purpose.

A second exception to the requirement that tipped employees keep all tips earned is where tips are charged on a customer's credit card. In such cases, the employer, who must pay the credit card company a percentage on each sale, may pay the employee the tip earned, less the percentage charged by the credit card company. For example, where a credit card provider charges an employer 2 percent on all sales charged, the employer may pay the tipped employee 98 percent of the tips without violating the FLSA. However, this charge on the tip may not reduce the employee's wage below the required minimum wage. The amount due the employee must be paid no later than the regular payday and may not be held while the employer is awaiting reimbursement from the credit card company.

The third exception to the requirement that tipped employees keep all tips earned is the focus of this article. It allows an employer to utilize a tipped employee's earned tips as a credit against a portion of the minimum wage obligations to the employee. For example, an employer who is required to pay employees a federal minimum wage of $7.25 per hour may, under the FLSA, take a credit of $5.12 per hour from the employer's minimum wage obligations for employees who customarily and regularly receive more than $30 per month in tips. What results is that an employer is only required to pay tipped employees a minimum wage of $2.13 per hour. The difference between the federal minimum wage ($7.25) and the federal tipped employee minimum wage ($2.13) is referred to as the "tip credit" ($7.25 - $2.13 = $5.12 tip credit).

The amounts used in this example would vary by state if the state has its own, higher minimum wage. In Florida, for example, the minimum wage is currently $8.05 per hour and the tipped employee minimum wage is $5.03 per hour. A Florida employer's tip credit for an employee who customarily and regularly receives more than $30 per month in tips is therefore $3.02 per hour ($8.05 - $5.03 = $3.02 tip credit). Of course, if the employer decides to pay a tipped employee the full minimum wage rather than the sub-minimum wage, a tip credit would not apply. Note that an employer utilizing the tip credit does not physically retain any portion of the employee's tip nor does the employee actually turn over any money to the employer. Instead, as the prior example shows, the tip credit is effectuated by the employer paying the tipped employee a lower minimum wage.

Tip Credit Notice Requirements

Before an employer can take advantage of the tip credit for tipped employees and pay the lower minimum wage, the FLSA and DOL regulations require employers to give the tipped employee notice:

  1. of the amount of cash wage the employer is paying the tipped employee (which must be at least $2.13 per hour);
  2. of the additional amount claimed by the employer as a tip credit (which cannot exceed $5.12; see calculation example above);
  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.

There is no clearly defined rule or standard for providing the notice and the employer is only required to inform the employee - detailed explanations and employee understanding is not required. Indeed, the issue of what constitutes adequate notice has been the subject of many court opinions. But courts are in agreement that employers do not have to explain the tip credit notice but rather must simply inform employees. Employers may give oral or written notice; if in the notice is in writing it can be accomplished through various media.

Some courts have held that a poster containing the required information and displayed in a prominent area where employees frequent could be sufficient notice. Other courts have held that oral notice and written notice (such as information contained on the employee's paystub), combined, adequately provided the tip credit notice to the employee. Nonetheless, employers should not leave such a determination to the courts because complying with the notice provision is simple. Moreover, because employees come and go, locating a former hiring manager to testify that he or she previously verbally provided an employee the required tip credit notice is risky.

Consequences of Failing to Comply with Tip Credit Notice

Employers who utilize the tip credit to pay a tipped employee a subminimum wage and who fail to comply with the FLSA's tip credit notice provision face stiff statutory penalties. First, the employer will be liable to the employee for the tip credit. This means that in states that follow the federal minimum wage, the employer must pay the tipped employee back the $5.12 tip credit for each hour the employee worked. If the tipped employee worked 40 hours per week for two years, the amount of back pay owed would be approximately $21,299.20.

Second, the FLSA further provides the tipped employee additional damages in an amount equal to the back pay as a form of liquidated damages (a predetermined penalty for noncompliance with the FLSA). Therefore, in the example above, a successful litigant could recover both $21,299.20 in back pay and $21,299.20 in liquidated damages.

Third, a successful litigant may further recover his or her attorney's fees and costs, which given the cost of litigation, could undoubtedly exceed both the back pay and liquidated damages amounts in the example above. Finally, let us not forget the amount the employer will spend on its own attorneys in defending the claim.

Best Practices for Giving Tip Credit Notice

To avoid a dispute on whether a tipped employee received the tip credit notice, employers should consider implementing a tip credit notice form as part of their new hire procedures. Further, if an employer has any doubts as to whether a current tipped employee received the tip credit notice or if the tip credit notice was given verbally, the employer should provide the current tipped employee with the notice again, in writing. The notice should include the following information:

  • The amount of cash wage to be paid to you per hour will be $_____.
  • The amount of your tips per hour to be credited as wages will be $_____ per hour if you have received a sufficient amount of tips to cover the tip credit.
  • You have the right to retain all the tips you receive, except for a valid tip pooling arrangement limited to employees who customarily and regularly receive tips.
  • Your required tip-pool contribution or percentage is _____.
  • The tip credit being taken is only on the amount you actually receive in tips and may not exceed the value of the tips you receive.
  • The tip credit shall not apply unless you have been informed of these requirements.

Providing tipped employees the tip credit notice is easy to do but also easy to overlook. Best practices dictate that the tip credit notice should be in writing, acknowledged by the employee, and made part of the employee's employment file.

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Hotel Newswire is a newswire service that distributes press releases on behalf of our users. If you decide to submit a press release for distribution through our system we will transmit your entire press release including any personal information therein contained to our media contacts and online distribution points including search engines. This is the only redistribution of your information that we engage in. Your submission of press releases through our system indicates consent with this policy. The information we collect during your registration process is used to notify users about updates to our service and inform users of any special events hosted by Hotel Newswire. This information is not shared with other organizations for commercial or non-commercial purposes.

Cookies: Our system requires the use of cookies to enable the user to log back into our website to access information from the newswire, without having to log in each time using the required username and password.

If you do not want to receive email from us in the future, please let us know by following instructions included in our communication with you. Users who supply us with telephone numbers online may receive telephone contact from us regarding their account, or informing them of new products and services available on the HotelExecutive website. If you do not wish to receive such telephone calls, please edit your account and remove your phone number from your account profile. This can be done from your user account menu.

Ad Servers: We do not partner with or have any relationship with any ad server companies. From time to time, we may use customer information for new uses not previously disclosed in our privacy notice. If our information practices change at any time, we will post the policy changes to our website to notify you of these changes and provide you with the ability to opt out of these new uses. If you are concerned about how your information is used, you should check back at our website periodically.

Upon request we provide site visitors with access to all information (including proprietary information) that we maintain about them. Users can access this information by logging in to their account.

Security: We always use industry-standard encryption technologies while transferring and receiving user data exchanged with our site. We have appropriate security measures in place in our physical facilities to protect against the loss, misuse, or alteration of information that we have collected from you on our site. We do not store credit card information in our systems.

If you feel that this site is not following its stated information policy, you may contact us.

Mia A. Mackman Wellness Real Estate Valuation and Finance
  • By Mia A. Mackman, President & Owner, Mackman ES

    • As the wellness real estate market continues to accelerate, it seems increasingly clear that wellness and sustainable asset types will become a new class of properties in the market. Whereas these developments have been underway for a while, these assets often have distinct property features that require reconsidering the wide and general framework of conventional financing, valuation methodologies, CAP rate averages, and WACC factors. This article describes an outlook for this new asset class to help identify and unlock wellness and sustainability in hospitality finance. Traditional Property Developments Hotel and resort property types vary widely. It is...

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Catherine Strauss Planning and Preparing for the Arrival of Government Agents
  • By Catherine Strauss, Office Managing Partner, Ice Miller LLP

    • In today’s environment, all businesses, including those in the hospitality industry, should plan and prepare for a government inspection, audit and/or unplanned visit. Not only does this make good practical sense but provides the added value of encouraging and assisting general regulatory compliance. Worry is not preparation; action is preparation. With the right action, in advance, businesses can be equipped to deftly handle whatever might come their way. Since the beginning of 2025, ICE - short for U.S. Immigration and Customs Enforcement - has radically increased its inquiries, subpoenas, investigations, audits and enforcement of immigration activity. The hospitality industry...

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Matthew Mering Re-Imagining The Outdoors: Building Hospitality Brands at The Gateway to Nature
  • By Matthew Mering, Executive Vice President of Hospitality, Waterton

    • There is a distinct magic in stepping outside and being instantly immersed in nature. For many travelers, the draw of the outdoors isn’t just about escaping the city or disconnecting from screens; it’s about a deeper sense of freedom, possibility, and connection. As travel patterns evolve, hospitality brands operating near national parks and outdoor destinations are uniquely positioned to shape how people engage with the natural world. What was once a niche offering, has become one of the most dynamic and in-demand sectors in travel, fueled by the rising appetite for meaningful, adventure-driven experiences. As more travelers prioritize wellness, mental...

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Anita Summers Frenchman's Reef: Dining in a Renewed Paradise
  • By Anita Summers, Principal, Cooper Carry

    • In 2017, Hurricane Irma and Hurricane Maria struck the northeastern Caribbean Islands in a devastating back-to-back blow, causing detrimental damage to the then-Frenchman’s Reef Marriott Resort and adjacent Morningstar Beach Resort. Having originally opened in 1973, the beloved St. Thomas resorts were forced to close their doors and begin the rebuilding process. Rebuilding and Restoring The years following the devastation from the hurricanes consisted of a change in ownership and management, extreme weather occurrences and construction stalls due to the pandemic. However, in 2023, 50 years after the resort’s original debut, Frenchman’s Reef opened its...

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Danny Williams Elevating Hospitality: The Role of Entertainment in Hotels
  • By Danny Williams, Managing Director, Trump International Beach Resort Miami

    • A leading Miami beachfront resort creates a newly formed position of Recreation Operations Manager, paired with a comprehensive line-up of all-new family-friendly offerings, to provide a splash of fun just in time for spring and summer getaways. In the world of travel and luxury hospitality, hotels and resorts strive to create memorable experiences for their guests. While comfortable accommodations and exquisite dining are essential components, the role of in-house entertainment should not be overlooked as hotels and resorts compete with cruise ships, all-inclusives, attractions, theme parks, and other venues when it comes to entertainment and family fun. From...

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Grey Poplin Creating Hospitality Cohesion With 90 Global Projects
  • By Grey Poplin, Global Brand Manager, Valor Hospitality Partners

    • In a world increasingly defined by diversity and cultural exchange, the hospitality industry stands as a bridge connecting people from all walks of life. Travelers seek experiences across the globe, and the concept of creating hospitality cohesion in projects spanning several continents and cultures has never been more important. While brands should aim to blend innovative design, unique storytelling and personalized experiences that speak to the property’s locale, it’s imperative to create a sense of harmony between projects when managing a multinational portfolio. Whether a hotel is nestled in the heart of a bustling city or found off the beaten...

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Alina Arnelle Implementing Transformative Hotel Sustainability Data Management Practices
  • By Alina Arnelle, Chief Sustainability Officer, BeCause

    • As the European Union gets set to introduce new regulatory frameworks governing environmental, social governance (ESG) and sustainability reporting, many hotels operating in the region face a similar problem: the efficient management and availability of trustworthy data about their environmental footprint that they can easily share with stakeholders in a standardized format. But this isn't just an EU issue, few hotels around the world possess the valuable insight required for them to reduce their harmful impact on the planet. That is, unfortunately, due to the industry-wide reliance on inefficient and manual processes - think emails, surveys, spreadsheets and checkboxes...

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