Tip Reporting 101

PART ONE: TIPPED EMPLOYEES AND TAKING TIP CREDIT

Did you know that violating the Department of Labor’s rules and regulations regarding tip credits can be costly and include back wages, liquidated damages, and in some cases, civil money penalties? An employee cannot simply work for tips! This is a big misconception and causes frequent violations in the restaurant industry.

Tipped employees are individuals who customarily receive more than $30 a month in tips. Currently employers are allowed to pay tipped employees $2.13 per hour and take what’s called a tip credit, in the amount of $5.12 per hour.

What this means is a restaurant, or other employer of tipped employees, is ensuring that your employee will earn enough tips to satisfy the Federal Minimum Wage rate of $7.25 per hour worked. Let’s talk about your obligations.

First things first, upon hiring you must inform your employee that you are taking a tip credit. This is important because if you are investigated, DOL will ask your employee if you, the employer, advised them of the tip credit. Second, you must ensure that your employee receives enough monies during each work week to satisfy the Federal Minimum Wage. If an employee’s cash wage and tips do not equal minimum wage, the employer must pay the difference. Third, you must keep accurate records of the employee’s pay to show that their cash wage of $2.13 and their tips together equal at least $7.25 for all hours worked under 40 in that work week.


Understanding the tip credit can be complicated, but I will continue to share my experience on how to avoid these costly mistakes. Next time, I will provide some “tips” on how to use an easy formula to compute overtime for tipped employees. In the meantime, please contact me at shannon@gotchacoveredhr.com if I can be of assistance to your organization.

PART TWO: CALCULATING OVERTIME PAY

Small business owners often make the mistake of not paying their tipped employees the correct wages. And when it comes to paying tipped employees overtime, things can get a little more complicated.

In our last article, we talked about the legalities associated with not being in compliance with federal law in relation to the tip credit and tipped employees. To recap:

  • Tip credits allow employees to pay a lower cash wage than the Federal Minimum Wage
  • Tipped employees must be told the employer is taking a tip credit
  • The employer must pay employees a minimum cash wage of $2.13 per hour
  • The employer must ensure employees earn $7.25 for all hours worked under 40 in the work week
  • If employees do not make enough to earn minimum wage, the employer must pay the difference

Now Let’s Discuss Today’s Message – How to Calculate Overtime for Tipped Employees

In addition to ensuring employees receive minimum wage for all hours worked, employers must calculate overtime for employees based on the full minimum wage. Overtime is owed to a non-exempt employee for every hour worked over 40 in a single workweek.

Let’s calculate an overtime payment for an employee who earns $2.13 per hour.

A tipped employee works 10 hours of overtime and receives a cash wage of $2.13 per hour, the tip credit is $5.12 in this case.

Here is how DOL will calculate what is due to this employee:

$7.25 (Federal Minimum Wage) x 1.5 (time and ½) = $10.88

$10.88 – $5.12 (tip credit) = $5.76 (amount due employee for each overtime hour worked)

$5.76 x 10 = $57.60 (monies due employee)

In my work as a former federal investigator with the U.S. Department of Labor, I frequently found violations in this computation. Most often, employers would compute overtime as:

$2.13 x 1.5 = $3.20 x 10 = $32.00

THIS IS INCORRECT and is a violation of the overtime laws! This mistake can cause you to lose the right to use the tip credit, and additionally you may have to pay back wages, liquidated damages, and civil money penalties.

We can help you navigate through these complicated rules and regulations as it relates to tipped employees and make sure you are in compliance with Federal Labor Laws. Please contact me should you have any questions and remember, we Gotcha Covered!