What’s a Tip Credit and How Does It Affect Me?

Many employees rely on tips from patrons to supplement their wages. As a matter of fact, there are certain industries, usually related to food services or hospitality, in which tips are the bulk of an employee’s earnings. Despite this being a common practice, there are still many employers and employees in these industries unsure how to handle tips and how to follow the laws regarding wages and tips.

One of the biggest areas of confusion is calculating minimum wage and understanding how tip credits affect wages. Workers who are often tipped are governed by different requirements than other workers. For instance, employers are not required to pay the usual minimum wage to tipped workers, and in turn, cannot deduct the usual amount from an employee’s paycheck.

What Should You Know as a Tipped Employee?

Typically, you qualify as a tipped employee if you receive more than $30 per month in tips from patrons. Minimum wage laws apply to tipped employees, but in a different way than they do a non-tipped employee.

According to federal minimum wage laws, employers are required to pay tipped employees a regular wage of at least $2.13 per hour (state minimums are sometimes higher). This minimum is based on the assumption tipped employees will earn enough from tips to ensure their minimum hourly wage is at least the federal minimum.

For a complete list of state-to-state minimum wage laws, check out this list from the US Department of Labor.

How Tip Credits Work

Tip credits affect minimum wage calculations. They allow an employer to credit some of the employees’ tips toward the employer’s obligation to pay minimum wage. Tip credit are not deducted from pay, but show as a line item on a pay stub. Employers are not taking anything from employees, they are just acknowledging tips exist and claiming a certain amount against minimum wage. Tip credits cannot exceed the actual amount of tips received, so if tips do not reach minimum wage levels, employers are required to make up the difference.

Tipped employees are still considered hourly employees, which means the benefits, including overtime pay, that apply to hourly employees apply to tipped employees. If an employee works more than 40 hours per week, the employer is not permitted to increase tip credits for the additional earnings, but is still required to pay overtime wages according to the law.

Employers Cannot Take Employee Tips

It’s also important for tipped employees to realize that according to federal laws, under no circumstances can an employee be forced to turn over his or her tips to an employer, unless there is a valid tip pool set up. A tip pool is used to combine tips of all employees and then divide them within their group.

Unfortunately, despite the law established to protected tipped employees, many employers still mismanage wages, either unintentionally or to take advantage of the confusion. If you have questions about your wages as a tipped employee or you believe your employer has mismanaged your paycheck intentionally, we can help. Contact Borrelli & Associates, P.L.L.C. to discuss your situation.