The Fair Labor Standards Act (“FLSA”), which governs overtime compensation and minimum wages, provides special rules for paying employees who receive tips from customers. The FLSA obligates all employers to pay employees a minimum wage of $7.25 per hour. Under limited circumstances, however, an employer may pay tipped employees $2.13 per hour, and apply up to $5.12 per hour from the tips the employees receive. Under the FLSA, “tipped employees” are employees who customarily and regularly receive more than $30 per month in tips, and include traditionally tipped workers, such as servers, bartenders, bellhops, and bussers. To qualify for the tip credit, however, employers must follow all of these rules:
Rule 1: Tips Belong to the Employees
Under the FLSA, tips belong to the employees, and an employer may not take or use any portion of the tips other than to pay tipped employees. An employer may, however, require tipped employees to participate in a valid tip pool with other tipped employees. For example, a restaurant may require wait staff to contribute a certain percentage of their tips to a pool that is distributed to bussers. To be a valid tip pool, the employer must follow two additional rules. First, the tip pool must be distributed solely among tipped employees, which means employees who customarily and regularly receive tips. Thus, using the tip pool to pay traditionally hourly workers, such as dishwashers, cooks, and other kitchen workers, is not a valid tip pool. Likewise, employers who use the tip pool for other purposes, like paying operating costs, bonuses for owners and managers, deductions for walkouts, “breakage” fees for broken dishes, the costs of uniforms, or any other expenses, are using the money unlawfully. Second, like the notice required for the tip credit, the employer must notify the tipped employees “of any required tip pool contribution amount.” Employers must tell their workers how the contribution was calculated. If an employer is not telling its employees where the money is coming from and where it is going, that is a red flag that it is doing something wrong.
Rule 2: The amount claimed by the employer as a tip credit cannot exceed the amount of tips received by the employee.
If an employee receives less than $5.12 per hour in tips, the employer’s tip credit is limited to the amount of tips actually received.
Rule 3: The employer must inform its tipped employees that it is applying the tip credit provisions of the FLSA.
Employers must inform employees that it is taking a credit of $5.12 per hour from the employee’s tips to pay the employee the minimum wage. Employers routinely fail to follow this rule, and often assume that the employee understands the pay plan. An employer’s failure to notify the employees of its compensation plan is often a red flag that it is doing something wrong.
Rule 4: The employer must keep accurate records.
The FLSA allows an employer to apply a tip credit to “tipped employees.” To qualify an employee as a “tipped employee,” however, the employer must keep records of the employee’s tips. Failing to maintain these records could invalidate an employer’s tip credit.
What You Can Do If Your Employer Misappropriated Your Tips
When an employer fails to follow any of the rules to qualify for a tip credit, the employees can recover up to $5.12 per hour for all the time that they worked in the previous two years for most cases, and three years if the violation is found to be willful. In addition, the FLSA allows employees to recover the same amount in liquidated damages, and to recover their attorneys’ fees.
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 29 U.S.C. § 203(m); Bernal v. Vankar Enters., Inc., 579 F. Supp. 2d 804 (W.D. Tex. 2008) (finding tip credit invalid because employer did not inform employees of tip credit provisions); Bonham v. Copper Cellar Corp., 476 F. Supp. 98, 101 (E.D. Tenn. 1979) (same).
 Bingham v. Airport Limousine Serv., 314 S. Supp. 565, 572 (W.D. Ark. 1970) (holding limousine drivers were not “tipped employees” because employer did not maintain records).
 29 U.S.C. § 203(m); 29 C.F.R. § 531.54; WH Admin. Op. (Sept. 5, 1978); WH Admin. Op. (Mar. 26, 1976).