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The FLSA Tip Credit Explained


The Fair Labor Standards Act (FLSA) is a federal law that sets minimum wage, overtime, and other employment standards, affecting both private and public sectors of employment. There are many provisions within the FLSA that permit employers to avoid paying their employees minimum wage and/or overtime. One such provision is the “tip credit” offered to employers of “tipped” employees.

Tipped employees are those who customarily and regularly receive more than $30 per month in tips. Tips are the property of the employee, and the employer is prohibited from using an employee’s tips for any reason other than as a credit against its minimum wage obligation to the employee or in furtherance of a valid “tip pool.” An employer can only count tips actually received to determine whether the employee is a tipped employee and in applying the tip credit.

Which Employees Are Covered Under the FLSA Tip Credit?

The FLSA permits employers of tipped employees to take a portion of its employees’ tips as a credit towards paying the employees minimum wage. The current minimum wage is $7.25 per hour. All applicable employees must earn the federal minimum wage of $7.25 per hour.

Under the FLSA’s tip credit, an employer must pay its tipped employees a cash wage of $2.13 per hour. The employer can then take $5.12 per hour from its employees’ tips to reach the current federal minimum wage of $7.25. If the employee does not earn at least $5.12 per hour, then the employer is responsible for making up the difference and paying the employee the federal minimum hourly wage.

In other words, regardless of whether the employee makes $5.12 per hour in tips, the employer must pay its tipped employees the minimum hourly wage. Alternatively, the tip credit cannot exceed $5.12 per hour, meaning that if an employee earns more than $5.12 per hour in tips, the employer is not authorized to take the excess amount.

Do Employers Have to Give Notice If They Use the FLSA Tip Credit?

If an employer is going to utilize the FLSA’s tip credit, then it must provide employees notice that includes the following:

  • The amount of cash wage the employer is paying its tipped employees
  • The additional amount being claimed by the employer as a tip credit (not to exceed $5.12 per hour)
  • That the tip credit cannot exceed the amount of tips actually received by the tipped employee
  • That all tips received by the employee are to be retained by the employee (except for a valid tip pool arrangement)
  • That the tip credit will not apply to any tipped employee who has not been informed of the tip credit provisions

This notice can be provided orally or in writing. If an employer utilizes the tip credit but forgets or neglects to inform its employees of the same, then that employer cannot utilize the tip credit and must pay its employees the minimum hourly wage rate of $7.25 per hour. Regardless of whether an employer chooses to utilize the tip credit, tipped employees are entitled to receive at least the minimum wage.

Contact Our Firm If You Need Reliable Legal Representation

If you feel your rights under the Fair Labor Standards Act have been violated, or if you have any other questions regarding your employment rights, please contact the experienced Birmingham employment law attorneys at Michel | King so we can discuss your situation and advise you on all of your options under the law.

To schedule a case consultation with our reputable legal team, please give us a call today at (205) 265-1880 or contact us online.

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