I’m in a restaurant and my kid secretly declares war on the floor below the highchair. While I’m trying to contain the damage, my wife’s iced tea finds it way within the arm-reach danger zone. Containment breached. For a brief moment the table and floor are a raging river of macaroni, French fries, and iced tea. In the aftermath I catch the wide eyes of my waiter as he is walking toward me, and in that moment I am very aware of America’s rich tradition of tipping waiters and waitresses.
Despite the common awareness that wait staff are paid lower hourly wages but supplement those wages with tips, restaurant owners still have to do more than say, “duh” when explaining pay to their new employees. They have to give specific notice of the tip credit requirements. This notice requirement is just one of several requirements restaurant owners need to be keenly aware of if they want to use what is known under the Fair Labor Standards Act (FLSA) as the “tip credit.”
What is the tip credit?
Restaurants have an obligation to pay the applicable minimum wage to employees. The tip credit allows a restaurant to credit the value of tips actually received by customarily tipped employees (waiters, etc., receiving at least $30.00 in tips a month) against its obligation to pay hourly minimum wages.[1] The tip credit equals the difference between the hourly minimum wage and the hourly floor rate under local, state, and federal law.[2]
What are the requirements to use the tip credit?
The tip credit may only be used to compensate tipped employees who regularly and customarily receive at least $30.00 per month in tips.[3] Further, the tip credit rates may only be used for tipped work.[4] To use the tip credit the employer is required notify its tipped employees of the following:
(1) What floor rate the employer will pay. Under the FLSA, federal law requires that the floor rate cannot be less than $2.13 per hour. However, in Maryland, state law requires the floor rate to be at least $3.63 per hour.
(2) How much will be claimed as the tip credit. For example, a covered restaurant in Anne Arundel County would be able to claim up to $5.12 as a tip credit. ($8.75 minimum wage less $3.63 floor rate).
(3) That the amount claimed as the tip credit may not exceed the tips actually received by the employee. If the employee makes less in tips than the tip credit claimed, the employer has to make up the difference so that the employee actually receives at least the required minimum wage.
(4) That, with the exception of a valid tip pool, the employee keeps all tips. Screwing up a tip pool is a great way to get sued. If you include yourself as the employer, or non-tipped employees in the tip pool you may lose your ability to use the tip credit.[5]
(5) That the tip credit does not apply to employees who have not received this information on the tip credit either by written or oral notice.[6] The burden is on the restaurant to prove that the employee received this notice. If the restaurant fails to provide formal notice, or otherwise fails in these requirements, it may not claim the tip credit and may find itself subject to a lawsuit.[7]
Recommendation
The tip credit laws take a simple concept and make it complicated. Because of this, restaurants big and small are finding themselves subject to costly litigation. The solution, however, is pretty simple: do the right thing and document, document, document.
In this context there are two things restaurant owners should be doing. First, keep a written, signed record that each tipped employee was notified of the restaurant’s use of the tip credit as described above. Second, put a system in place that keeps an accurate record of the tips employees received so that you can demonstrate that the tip credit claimed was not actually more than the tips the employee received.
If you have questions about the tip credit, or any other employment issue facing your business, the employment attorneys at Council Baradel are available to discuss these matters and make sure your business is in compliance with local, state, and federal wage and hour requirements.
[1] Morataya v. Nancy's Kitchen of Silver Spring, Inc., No. GJH-13-01888, 2015 WL 4459387, at *3 (D. Md. July 17, 2015). [2] Id.; Md. Code Ann., Lab. & Empl. § 3-419(c). [3] 29 C.F.R. § 531.51. [4] MD. COMAR 09.12.41.19. (“A tipped employee who spends more than 20 percent of the employee's work time performing non-tip producing duties directly related to their tipped occupation shall be paid by the employer at least the minimum wage for that time.”). [5] Morataya, 2015 WL 4459387, at *5. [6] 29 C.F.R. § 531.59. [7] Morataya, 2015 WL 4459387, at *6.
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