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What are Tip Credits? Should I be Concerned About How my Employer Handles Them?

Posted by Kira Fonteneau | Jun 20, 2020 | 0 Comments

Under federal law and the laws of most states, employers are allowed to pay employees who earn tips an hourly rate that is below the minimum wage, as long as the income they earn from their tips makes up the difference. This is commonly known as a “tip credit”, because the tips the employee earns are counted toward their employer's obligation to pay them the minimum wage. 

Tip credits can only be claimed by an employer if an employee earns at least $30.00 in tips per month. In addition, if the combined wages and tips of the employee does not equal at least $7.25 per hour (the current federal minimum wage and the current minimum wage in Alabama), the employer is required to make up the difference.

Employers are allowed to pay as low as $2.13 per hour and take a tip credit of up to $5.12 to bring the employee's combined hourly rate up to at least $7.25. This can be problematic for employees that do not earn tips all the time – for example, a restaurant worker who works most of the time as a waitress, but sometimes fills in as a hostess. This could also become an issue with employees who earn higher tips during certain times of the year (such as the holiday season), but their tips drop significantly during slow seasons.

Tip credits are fairly common in the hospitality industry, but they can create some problems that employees should be aware of:

Overtime Pay

During busy seasons especially, employees are often asked to work overtime. Calculating overtime pay is fairly simple with a regular hourly employee who is paid minimum wage or higher. The employer simply pays the employee their regular hourly rate x 1.5 (i.e., time and a half) for the overtime hours. For example, if you earn $10.00 per hour and work 5 hours of overtime, you are paid $15.00 per hour on those 5 hours.

Things can become a lot more complicated if you and tip credits into the mix. Employers who take a tip credit are still required to pay employees time and a half on their full minimum wage. So, if an employer pays $2.13 per hour and takes a $5.12 per hour tip credit, they need to pay time and a half on $7.25 per hour, not $2.13 per hour. If an employer is paying time and a half on only 2.13 per hour in this scenario, this would be a wage violation.

Tip-Pooling

Employees may be required to participate in a tip pool in which their tips are shared with other employees, but supervisors and managers are not allowed to participate in such a pool. As of 2018, this is true regardless of whether or not the employer takes a tip credit. If any type of employer allows management to be part of a tip pool, this would be another violation of wage and hour laws. Along these same lines, if an employer were to require employees to give back a percentage of their tips to cover overhead or other employer expenses, this would also be against the law.

Tip-Pooling for staff that does not regularly receive tips (e.g., dishwashers, cooks, and other back house staff) is also forbidden in establishments where employers take a tip credit. If the employer does not take a tip credit, these types of employees are allowed to participate in the pool.

Credit Card Processing Fees

Many employers make a regular practice of subtracting processing fees from employee tips that are put on a credit card. For example, the average fee imposed by the banks to process a credit card charge is 3%. Employers in most states are allowed to take out that fee and give only 97% of the tip to key employee. This could create problems when an employer takes tip credits if the 3% deduction puts the employee below the $7.25 per hour minimum wage and the employer fails to make up the difference.

Contact Alabama Employment Law Attorney Kira Fonteneau

If you are a tipped employee in Alabama, your employer takes tip credits, and they have committed violations of the Fair Labor Standards Act (FLSA), there are legal remedies available; which may include compensation for the amount of wages you were shorted as well as monetary damages. It is also a violation for an employer to terminate or discriminate against an employee who files a complaint or participates in an FLSA legal proceeding.

For skilled guidance with FLSA violations and all other employment law matters, call attorney Kira Fonteneau today at (404) 383-5720 for a free consultation or send us a message through our online contact form.

About the Author

Kira Fonteneau

Partner and Managing Attorney of the Alabama Trial Practice Group at Barrett & Farahany Kira Fonteneau is a partner and the managing attorney of the Alabama trial group of Barrett & Farahany. Kira chose to specialize in employment law because she wanted to help employees take back power. ...

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