Magazine article The CPA Journal

FLSA: The Tip Credit

Magazine article The CPA Journal

FLSA: The Tip Credit

Article excerpt

While the Fair Labor Standards Act (FLSA) allows employers to pay employees less than minimum wage (currently $5.15 per hour) in certain circumstances, employers must first satisfy all statutory and regulatory requirements before permitting anyone to work for less than minimum wage.

FLSA section 203 allows employers to credit the tips a tipped employee receives against the minimum wage. The Code of Federal Regulations (CFR) defines a tip as an amount "presented by a customer as a gift or gratuity in recognition of some service performed for him." Gifts other than money, such as merchandise, are not tips. The FLSA allows a separate credit for employer-provided meals and lodging. According to the 29 USC section 203(t), a "tipped employee" works "in an occupation in which he customarily and regularly receives more than $30 a month in tips." Where an employee performs more than one function, one or more of which are in a position where she does not customarily and regularly receive $30 in tips per month, the employer can use the tip credit only for time spent performing tipped work.

The FLSA permits employers to pay a tipped employee cash wages of $2.13 per hour, provided the employee's gross compensation (tips plus cash wages) equals at least the minimum wage. New York Labor Law section 652(4), however, requires a higher cash wage for many occupations.

Before claiming credit for tips received by a tipped employee, an employer must first meet two conditions:

* The employer must explain it to the employee in advance; and

* The employee must retain all tips she receives.

The second condition has two exceptions:

* Employees that "customarily and regularly receive tips" may pool their tips, and

* Employers may reduce tips paid by credit card to reflect the fee charged by the credit card company.

Illustrative Cases

Kilgore v. Outback Steakhouse of Florida, Inc. [160 F.3d 294, 4 WH Cases 2d 1729 (6th Cir. 1998)] is the leading case on the tip credit. Among other things, the plaintiff class claimed that Outback failed to inform them of the tip credit. The court disagreed, holding that an employer must merely inform employees of its "intent to take a tip credit," not explain it. The court also held that the FLSA does not limit the amount of tip-out (the amount servers have to share with other employees) to a customary or reasonable amount.

The plaintiffs also challenged the restaurant's inclusion of hosts in the tip pool; the court upheld Outback's policy. The plaintiffs' argument that hosts are not tipped employees failed because Department of Labor regulations indicate that tips received from a tip pool should be considered tips for the purpose of 29 USC sections 203(m) and (t), and because hosts at Outback are part of an occupation that customarily and regularly receives tips. …

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