Dear Service Industry: Are you in compliance with the new Tip Credit requirements?

What are tip-credits?  The Fair Labor Standards Act (“FLSA”) requires employers of tipped employees to pay these employees a cash wage below the minimum wage of $7.25 per hour.  The minimum cash wage for a tipped employee is $2.13 per hour, which the employer may then offset by taking a $5.12 tip-credit toward paying the rest of the $7.25 per hour.  However, an employer may only utilize the tip-credit should two conditions be met: (1) the employer gives notice to his employee of the provisions of the FLSA’s tip-credit subsection, and (2) the employee retains all tips she receives (excluding tips paid into a valid tip pool to be shared among multiple tipped employees).  Should the tipped employee not bring in enough in tips to reach minimum wage, the employer is required to pay the balance so the employee reaches the minimum wage threshold.

Tipped employees are employees who regularly make at least $30 per month in tips.  Tipped employees do not have to be tipped directly by the customers so long as they have sufficient interaction with the customers on a regular basis.  Restaurant hosts and hostesses qualify as tipped employees because they regularly receive at least $30 per month in tips from valid tip pools.  Note that tipped employees who work other jobs in the restaurant may qualify as non-tipped employees in their other capacities.  If an employee is a tipped waiter for 50% of the day and a janitor the other 50%, the employer may only take the tip-credit for the portion of the day that the employee works as a tipped waiter.

The Department of Labor (“DoL”) announced substantive changes to the federal tip-credit notice regulations on April 5, 2011.  The DoL did not provide much time for the members of the restaurant industry to give feedback and comments upon the substantive changes before requiring enforcement of the new provisions.  On May 3, 2011, the National Restaurant Association (“NRA”) met with the DoL to express its concerns over the new regulations and to ask for a 120-day delay in implementation until the DoL fully understood the industry’s concerns.  Such a delay was not granted.  The substantive changes officially took effect on May 5, 2011.

What are the new notice regulations?  If the employer wishes to take a tip-credit from his employees, he must inform them of the following four things.  The employer may provide either written or oral notice, though the NRA suggests providing written notice.

The amount of the cash wage to be paid to his employees;

The additional amount by which wages are increased by the tip value (increase in wages cannot exceed actual value of tips received);

The fact that all tips must be retained by the individual employee, with the exception of tips paid into a tip pool (tip pool is limited to employees who regularly receive tips); and

The fact that the tip-credit will not be applied to any employee who had not been informed of the previous three items.

The DoL also adjusted the maximum contribution percentage that an employer of tipped employees can require that the tipped employee contribute to a tip pool.  Formerly, the DoL capped the required contribution percentage at 15%, but the DoL has removed any cap on the percentage.  The DoL has already removed ambiguity regarding whether tips are the property of the employees; unequivocally, tips are the property of the employees.  The DoL has said that compulsory service charges do not count as tips, but may be used to fulfill an employer’s minimum wage obligation.  With regards to tips left on bills paid by credit card, employers are to pay the employee the tip less the percentage taken by the credit card company for use of its services.  For example, if a $10 tip is left via credit card and the credit card charges a 3% rate, the employer must pay his tipped employee $9.70.

The repercussions for employers who fail to give proper notice to their tipped employees about the tip-credit provisions are harsh.  If employers fail to give proper notice, the use of tip-credits is invalidated, meaning that the employers cannot take the tip-credit into account when paying employees minimum wage.  The possibility of civil and criminal penalties being assessed to infringing restaurant employers also looms large.
On June 16, 2011, the NRA, along with the Council of State Restaurant Associations and the National Federation of Independent Businesses, sued the DoL over the new tip-credit regulations.

We shall wait and see what happens, but for now all employers who employ any tipped employees must comply with the new tip provisions.

Daniel N. Ramirez is a named partner at Monty & Ramirez, LLP. He is board certified in labor and employment law by the Texas Board of Specialization and has been recognized as a Rising Star by Super Lawyers magazine.

Daniel’s Contact Information:

Email: dramirez@montyramirezlaw.com
Telephone: 281.493.5529
Website: montyramirezlaw.com