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Tip Credit Background
The federal Fair Labor Standards Act (FLSA) allows an employer to pay a tipped employee an hourly wage less than the legal minimum wage under certain circumstances. In Wisconsin the base/cash wage can begin at $2.33 an hour. The tipped employee’s tips and hourly wage when combined must equal at least the minimum wage (currently $7.25 an hour). The difference between minimum wage and the employee’s hourly wage is known as the tip credit. The amount of the tip credit can vary depending on the base/cash wages paid, but can’t exceed $4.92. If, over a pay period, an employee does not receive enough money in tips plus actual base/cash wages to bring him or her up to the full minimum wage, the employer must increase the base wage to make up the difference. The new DOL rules address what information must be provided to the employee by the employer in order for the employer to take advantage of the tip credit.
For example, if a restaurant takes the tip credit of $4.92 an hour ($7.25 minus the base/cash wage of $2.33) their employees would need to be informed of that.
What’s New?
While it was always recommended that employers inform employees that the tip credit was being utilized, the rules now require that employers must notify their employees. While this notification can be done verbally, it is strongly recommended that employers provide written notice, to make the evidence of their compliance indisputable.
This notice must include the following five points:
- Amount of direct base/cash wage to be paid to the employee (in Wisconsin the minimum base/cash wage is $2.33 an hour)
- Amount the employer claims as a tip credit (e.g. the difference between $2.33 and $7.25 an hour)
- The tip credit can’t exceed actual tip earnings
- Employers can’t claim the federal tip credit unless they inform employees of the federal law’s provisions on the tip credit
- The law requires that employees retain all their tip earnings, with the exception of contributions to valid tip pools
What Constitutes a Valid Tip Pool?
The guidelines for what is considered a valid tip pool haven’t changed. To review, a tip pool can only include those employees who customarily and regularly receive tips. Employees who don’t typically receive tips like cooks and dishwashers (and other back-of-the-house staff) may not participate in the pool. However, the new rules don’t set a limit on how much of their tips employees may be required to put in the pool. The rules now state that the law “does not impose a maximum contribution percentage.” In the past, the NRA and WRA had advised employers that the DOL would consider tip pools with a maximum threshold of 15% to be valid. Now that percentage is up to the employer. You must notify your employee how much they will be required to contribute to the tip pool.
Does WRA Have a Form I Can Use?
We have created a basic template that you can use. Keep in mind, however, that you are responsible for informing each employee of their specific base/cash wage and the amount of tip credit being taken. This information may vary from employee to employee within a business (unless all tipped employees are paid the same base/cash wage).
Download the Tip Credit Employee Notice template
We advise that you put employee tip credit notification in writing, so if there is ever an audit you will be able to prove that you properly notified employees. Remember, restaurants that don’t follow the new DOL requirements could lose their right to use the tip credit, forcing them to pay the full minimum wage to tipped employees!
Other Useful Links
The DOL has created a fact sheet “Tipped Employees Under the Fair Labor Standards Act (FLSA)."
The NRA has set up a section of their website that will serve as a one-stop shop for information on this issue. It will be continually updated as more information becomes available.
For more information contact the Wisconsin Restaurant Association at 800-589-3211. |
