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Some Federal FLSA Requirements for Tipped Employees

August 26, 2022

This summer, the Tribune Review reported that a Pittsburgh distillery, Wigle Whiskey, was ordered to pay back $38,951 to its workers after an investigation by the U.S. Department of Labor (DOL) revealed that the company violated the Fair Labor Standards Act of 1938 (FLSA). The DOL stated that Wigle Whiskey violated the FLSA when it required its servers to share tips with their managers and supervisors and by not paying a suitable overtime pay rate to its tipped employees.

Compensation rules covering tipped employees are complex. Both the Pennsylvania Minimum Wage Act (PMWA) and the federal Fair Labor Standards Act (FLSA) apply.  When an employee is subject to both federal and state wage laws, the law that provides the employee with greater benefits prevails.

This brief article summarizes some aspects of the federal Fair Labor Standards Act rules for tipped employees.  Pennsylvania adopted new rules in this area effective August 5, 2022.  The Pennsylvania rules will be the subject of a future article.

The FLSA is a federal law that established minimum wage and overtime pay. Under the FLSA, minimum wage for covered nonexempt employees is currently $7.25 per hour. The FLSA also requires nonexempt employees that work over 40 hours in a week to be paid an overtime rate that is one and one-half times the employee’s regular rate.

Under the FLSA, tipped employees customarily and regularly receive more than $30 a month in tips. Tips are the property of the employee. 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 (“tip credit”) or in furtherance of a valid tip pool. Only tips actually received by the employee may be counted in determining whether the employee is a tipped employee and in applying the tip credit.

The FLSA permits an employer to take a tip credit toward its minimum wage obligation for tipped employees equal to the difference between the required cash wage (which must be at least $2.13) and the federal minimum wage. The maximum tip credit that an employer can currently claim under the FLSA is $5.12 per hour (the minimum wage of $7.25 minus the minimum required cash wage of $2.13).

The requirement that an employee must retain all tips does not preclude a valid tip pooling or sharing arrangement among employees who customarily and regularly receive tips, such as waiters, waitresses, bellhops, counter personnel (who serve customers), bussers, and service bartenders. Under the FLSA employers are permitted to conduct tip pools, in which all tips are combined and redistributed evenly, so long as employers meet the set guidelines.  A valid tip pool may not include employees who do not customarily and regularly received tips, such as dishwashers, cooks, chefs, and janitors.  To use the tip credit, an employer must provide certain information to employees, or it is not allowed to claim the tip credit. When an employee is employed by one employer in both a tipped and a non-tipped occupation, such as an employee employed both as a maintenance person and a waitperson, the tip credit is available only for the hours spent by the employee in the tipped occupation.

Pennsylvania law requires a minimum wage of $7.25 per hour for nonexempt employees and a direct wage of $2.83 per hour for tipped employees. A new regulation that will go into effect on August 5, 2022, states that an employer cannot lower an employee’s wage from $7.25 to $2.83 per hour unless that employee receives at least $135 a month in tips.

Like Wigle, other employers have been confused by a series of rulemakings and modifications to the FLSA that started in 2020. Various sections of the 2020 Tip final rule, published on December 30, 2020, went into effect in 2021. After modification, the final rule states that managers and supervisors cannot receive tips from tip pools, but they can contribute to mandatory tip pools. Additionally, the final rule clarified that “managers and supervisors may only keep tips that they receive from customers directly for services that the manager or supervisor directly and ‘solely’ provides.”

This is just a partial summary of the federal Fair Labor Standards Act as it applies to tipped employees. Tip and wage laws can get more complex when other areas are involved, such as recordkeeping, calculation of overtime pay, and what constitutes “tip-generating” tasks. If you have a question about tip and wage laws, contact us online or call (412) 338-1144.

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