Your Rights as a Tipped Employee

Most of us will have worked a service industry job at one point. While in undergrad, I waited tables at several different restaurants to save money for law school. Waitressing taught me some really important things: how to carry a tray of champagne glasses without dropping it (I learned that the hard way), that you’ll probably get in trouble for honestly telling customers that you think certain dishes are disgusting (I’m scared of frogs in real life, what would make you think I’d want to eat frog legs?!), and that tips are the lifeblood of a lot of Americans.

This Blog will discuss some important considerations for employees who receive tips.

Tipped Employees and the Tip Credit

Tips are legally regulated just as other forms of pay are. The Fair Labor Standards Act (“FLSA”) is the main federal law that governs tips and tipped employees. Tipped employees are employees that regularly receive gratuities, like servers, bartenders, or valet drivers. This person must receive at least more than $30 per month in tips to be considered a tipped employee under the FLSA.

However, even if employees are tipped, employers still are obligated to pay their employees the federal minimum wage of $7.25 an hour. But you might have heard about “server pay,” or a different minimum wage for people who receive tips. The FLSA permits employers to claim a “tip credit,” which offsets the employer’s responsibility to pay tips. Employers may claim up to $5.12 per hour as a “tip credit,” meaning they can legally pay a tipped employee as little as $2.13 an hour, with the customers making up the difference by tipping said employees. This is the rate that many servers receive (and it’s the rate I got all those years ago). However, an important note about the tip credit: if the employee’s tips fall short, the employer must make up the difference so that the worker still earns at least $7.25 an hour overall. After all is said and done, tipped employees must still have made at least $7.25 an hour for the work done in a pay period, either via customer tips or direct pay from the employer.

The FLSA also requires employers to inform employees that it is taking a tip credit and must clearly explain how the tip credit works. Failing to do so may entitle the employee to earning minimum wage directly rather than the reduced amount with the tip credit.

This can be a little bit confusing, so let’s do an example. Sally works at a really popular tourist attraction restaurant, but it’s the slow season and she barely had any covers this week. After working a 35-hour week, Sally only made $50 in tips. Sally would have needed to be paid at least $253.75 for this week to satisfy minimum wage requirements. Therefore, her employer must make up the shortfall of $203.75 at $5.82 an hour. So, the employer can claim a tip credit towards minimum wage (of $1.43 per hour), just not the maximum tip credit (of $5.12 per hour) that would have allowed it to pay Sally just $2.13 an hour.

The Dreaded Tip Pool

Some people love a tip pooling system, others hate it. Tip pooling systems aggregate all the tips earned by a business and divide them amongst the employees. However, if the employer claims a tip credit, it can only include FLSA-defined tipped employees in the pool. If the employer does not claim a tip credit (i.e., pays all employees at least minimum wage), it can include even employees who are not considered tipped employees in the pool. Even then, though, the tip pool can not include management.

Tips Belong to the Employees, Not Management

Regardless of what system employers use for tipping (claiming a tip credit versus not, requiring a tip pool versus not), there is one overarching principle: tips belong to employees, not management. Your boss cannot take a portion of your tips—that’s illegal. The owners cannot take a portion of the tip pool for themselves, even if it’s to invest back in the business—that’s illegal. Your tips are yours.

Think your employer has been miscalculating your pay as a tipped employee or unlawfully withholding you tips? Contact me in Dallas or one of my talented colleagues in Houston or Austin today.

Also, if you’re still reading this… please tip those tipped employees. Thank you!