U.S. Department of Labor
Wage and Hour Division
Fact Sheet #15: Tipped Employees Under the Fair Labor Standards Act (FLSA)
(Revised March 2011)

This fact sheet provides general information concerning the application of the FLSA to employees who receive tips.

Characteristics

Tipped employees are those who customarily and regularly receive more than $30 per 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.

Tip Credit: Section 3(m) of 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. Thus, 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).

Tip Pool: 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. A valid tip pool may not include employees who do not customarily and regularly received tips, such as dishwashers, cooks, chefs, and janitors.

Requirements

The employer must provide the following information to a tipped employee before the employer may use the tip credit:

• the amount of cash wage the employer is paying a tipped employee, which must be at least $2.13 per hour;
• the additional amount claimed by the employer as a tip credit, which cannot exceed $5.12 (the difference between the minimum required cash wage of $2.13 and the current minimum wage of $7.25);
• that the tip credit claimed by the employer cannot exceed the amount of tips actually received by the tipped employee;
• that all tips received by the tipped employee are to be retained by the employee except for a valid tip pooling arrangement limited to employees who customarily and regularly receive tips; and
• that the tip credit will not apply to any tipped employee unless the employee has been informed of these tip credit provisions.

The employer may provide oral or written notice to its tipped employees informing them of items 1-5 above. An employer who fails to provide the required information cannot use the tip credit provisions and therefore must pay the tipped employee at least $7.25 per hour in wages and allow the tipped employee to keep all tips received.

Employers electing to use the tip credit provision must be able to show that tipped employees receive at least the minimum wage when direct (or cash) wages and the tip credit amount are combined. If an employee’s tips combined with the employer’s direct (or cash) wages of at least $2.13 per hour do not equal the minimum hourly wage of $7.25 per hour, the employer must make up the difference.

Retention of Tips: A tip is the sole property of the tipped employee regardless of whether the employer takes a tip credit. The FLSA prohibits any arrangement between the employer and the tipped employee whereby any part of the tip received becomes the property of the employer. For example, even where a tipped employee receives at least $7.25 per hour in wages directly from the employer, the employee may not be required to turn over his or her tips to the employer.

Tip Pooling: As noted above, 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. The FLSA does not impose a maximum contribution amount or percentage on valid mandatory tip pools. The employer, however, must notify tipped employees of any required tip pool contribution amount, may only take a tip credit for the amount of tips each tipped employee ultimately receives, and may not retain any of the employees’ tips for any other purpose.

Dual Jobs: 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. The FLSA permits an employer to take the tip credit for some time that the tipped employee spends in duties related to the tipped occupation, even though such duties are not by themselves directed toward producing tips.

For example, a waitperson who spends some time cleaning and setting tables, making coffee, and occasionally washing dishes or glasses is considered to be engaged in a tipped occupation even though these duties are not tip producing. However, where a tipped employee spends a substantial amount of time (in excess of 20 percent in the workweek) performing related duties, no tip credit may be taken for the time spent in such duties.

Service Charges: A compulsory charge for service, for example, 15 percent of the bill, is not a tip. Such charges are part of the employer’s gross receipts. Sums distributed to employees from service charges cannot be counted as tips received, but may be used to satisfy the employer’s minimum wage and overtime obligations under the FLSA. If an employee receives tips in addition to the compulsory service charge, those tips may be considered in determining whether the employee is a tipped employee and in the application of the tip credit.

Credit Cards: Where tips are charged on a credit card and the employer must pay the credit card company a percentage on each sale, the employer may pay the employee the tip, less that percentage. For example, where a credit card company charges an employer 3 percent on all sales charged to its credit service, the employer may pay the tipped employee 97 percent of the tips without violating the FLSA. However, this charge on the tip may not reduce the employee’s wage below the required minimum wage. The amount due the employee must be paid no later than the regular pay day and may not be held while the employer is awaiting reimbursement from the credit card company.

Youth Minimum Wage: The 1996 Amendments to the FLSA allow employers to pay a youth minimum wage of not less than $4.25 per hour to employees who are under 20 years of age during the first 90 consecutive   calendar days after initial employment by their employer. The law contains certain protections for employees that prohibit employers from displacing any employee in order to hire someone at the youth minimum wage.

Typical Problems

Minimum Wage Problems:

• Where an employee does not receive sufficient tips to make up the difference between the direct (or cash) wage payment (which must be at least $2.13 per hour) and the minimum wage, the employer must make up the difference.
• Where an employee receives tips only and is paid no cash wage, the full minimum wage is owed.
• Where deductions for walk-outs, breakage, or cash register shortages reduce the employee’s wages below the minimum wage, such deductions are illegal. Where a tipped employee is paid $2.13 per hour in direct (or cash) wages and the employer claims the maximum tip credit of $5.12 per hour, no such deductions can be made without reducing the employee below the minimum wage (even where the employee receives more than $5.12 per hour in tips).
• Where a tipped employee is required to contribute to a tip pool that includes employees who do not customarily and regularly receive tips, the employee is owed all tips he or she contributed to the pool and the full $7.25 minimum wage.

Overtime Problems:

• Where the employer takes the tip credit, overtime is calculated on the full minimum wage, not the lower direct (or cash) wage payment.  The employer may not take a larger tip credit for an overtime hour than for a straight time hour (i.e., $4.00 tip credit per hour for the nonovertime hours and $5.12 tip credit per hour for overtime hours).
• Where overtime is not paid based on the regular rate including all service charges, commissions, bonuses, and other remuneration.

Where to Obtain Additional Information

For additional information, visit our Wage and Hour Division Website: http://www.wagehour.dol.gov

and/or call our toll-free information and helpline, available 8 a.m. to 5 p.m. in your time zone, 1-866-4USWAGE (1-866-487-9243).

This publication is for general information and is not to be considered in the same light as official statements of position contained in the regulations.

U.S. Department of Labor

Frances Perkins Building

200 Constitution Avenue, NW

Washington, DC 20210

1-866-4-USWAGE

TTY: 1-866-487-9243

Contact U.S. Department of Labor

February 08, 2011-

The White House today announced that in next week’s budget proposal for FY2012, the president will propose that states be allowed to raise taxes on employers starting in 2014 to pay for unemployment insurance.

The proposal is being made in the context of trying to help states avoid raising taxes this year and next, senior administration officials said.

Under an agreement with the federal government, states collect taxes from employers on the first $7,000 in wages, at whatever rate they choose. The Obama administration proposal will allow them to collect taxes on the first $15,000 in wages.

Hypothetically, the states could tax the larger amount at half the rate, so taxes stay the same, but administration officials anticipate that states will not do that, given the rate of insolvency.

Right now states owe the federal government $42 billion in debt in terms of their obligations to the federal government for unemployment insurance – the largest debt they’ve ever incurred under the present agreement.

Three of the states hardest-hit economically – Michigan, Indiana, and South Carolina – have already seen tax rates for employers automatically triggered to a higher rate so as to avoid greater debt, and the administration says triggers for 20 other states are about to kick in.

For 2011 and 2012, as part of this proposal, the Obama administration would require a moratorium on states raising taxes to pay for unemployment insurance, and would allow states to avoid paying interest on their unemployment insurance debt.

“We are giving help to some states who have had to borrow and not been able yet to pay back — which would legally result in an increase in the federal share that is gotten through a tax on businesses — which we don’t think makes any sense right now,” White House press secretary Robert Gibbs said today.

Administration officials say this is a way for states to be given some breathing space to readjust their budgets during this period of economic recovery.

This proposal will, for “states that are overdrawn on this, ensure that we don’t place an extra burden on them,.” Gibbs said. “Let’s give them some time in an economic downturn to have what they need to effectively meet the needs of those that are unemployed and give them an understanding that in the future…they’re going to rationalize what is offered and how they come up with the funds to pay for what is ultimately offered.”

-Jake Tapper and Sunlen Miller

Recently, the FRLA has received several inquiries regarding tip outs and tip pooling.  The following information comes from the National Restaurant Association and is online at http://www.restaurant.org/profitability/support/legal/lps/

The most important aspect to keep in mind is that the employee receiving the tip out must be in an occupation that customarily participates in tip pools.

DOL policies also clarify the following regarding management-supervised tip pools: Tipped employees may not be required to share their tips with employees who are not in an occupation that customarily and regularly participated in tip-pooling arrangements, including, for example, janitors, dishwashers, chefs, cooks and laundry-room attendants.

MANAGEMENT-RUN TIP POOLS

Employers often ask whether it is possible for management to run a tip pool or participate in operating one. The answer is a qualified yes. Here are the DOL guidelines for tip pooling:

1. The requirement that an employee retain all tips does not prevent tip-splitting or tip-pooling arrangements among employees who customarily receive tips. The following occupations have been recognized by DOL as falling within the eligible category: bellhops, waiters and waitresses (including cocktail servers), counter personnel who serve customers, busers, and service bartenders. The DOL construes the FLSA as precluding employers from pooling tips among occupations that do not customarily and regularly participate in tip pooling, including dishwashers, chefs or cooks. However, in a 2008 opinion letter to the National Restaurant Association, DOL ruled that itamae-sushi and teppanyaki chefs may participate in tip pools since they had direct contact and interaction with customers since they prepared the customer meals on teppanyaki tables and served meals to customers. W-H Op. Ltr. December 19, 2008. Also see Ash v. Sambodrono, LLC, 2009 WL 3856367 (S.D. Fla. Nov. 17, 2009). It is not required that busers or others who share in tips receive tips directly from customers. Both the amounts retained by the servers and those given to busers are considered the tips of the individual who retains them.

2. A valid employer-operated tip-pooling arrangement cannot require servers to contribute a greater percentage of their tips than is customary and reasonable. For enforcement purposes, the DOL will not question pool contributions that do not exceed 15 percent of the employee’s tips. It should be noted that the DOL rules on tip pooling have at various times been challenged in court. In Kilgore v. Outback Steakhouse, Inc., 160 F.3d 294 (6th Cir. 1998), a federal appeals court found no statutory support for the DOL’s 15 percent rule. Nevertheless, the DOL stands by its rule, except in jurisdictions where an appellate court has struck down the rule. However, only tips in excess of the tip credit may be taken for the pool.

If the conditions above are met, the tip pool may be established and supervised by the employer; it does not require the voluntary consent of the employees involved. DOL policies also clarify the following regarding management-supervised tip pools:

• Tipped employees may not be required to share their tips with employees who are not in an occupation that customarily and regularly participated in tip-pooling arrangements, including, for example, janitors, dishwashers, chefs, cooks and laundry-room attendants.

• In the case of hosts/hostesses, headwaiters and seaters/greeters, the type of establishment and local practices will determine whether or not such persons can participate in a tip pool.

• In requiring even as a general principle that tipped employees retain all their tips, it does not appear that Congress intended to prevent tipped employees from exercising a free choice in deciding what to do with their tips. This includes sharing tips with co-workers of their choice in any amount they please, using tips to make payments to a 401(k) retirement plan or asking their employer to withhold federal and state taxes from their tips, as long as such decisions by the employee are entirely voluntary.

• Since tipped employees may not be required to share their tips with other employees under the FLSA except as specified above, this means that an employer cannot retain any portion of the tips. “Employer” is defined under the FLSA to mean “any person acting directly or indirectly in the interest of an employer in relation to an employee.” 29 U.S.C. § 203

Employees who act in a managerial or supervisor capacity are considered by DOL to be employer agents for purposes of the FLSA. See, for example, Chung v. the New Silver Palace Restaurant, 246 F. Supp, 2nd 220 (S.D. NY 2002). When an employer-established tip pool includes any ineligible employees, including supervisors, the employer must reimburse those who contributed to the pool in an amount equal to the tips turned over to the ineligible employees, and the employer may lose its eligibily to apply a tip credit against the wages paid to employees. See, e.g., Chan v. Triple 8 Palace, Inc., 2006 U.S. Dist. LEXIS 15780 at 46 (S.D. NY 2006). The employer may also not seek reimbursement from ineligible employees.

A recent court ruling from the U.S. Court of Appeals for the 9th Circuit (which covers the states of Alaska, Arizona, California, Hawaii, Idaho, Montana, Nevada, Oregon and Washington), however, raises questions under federal law (Note: does not apply to any state law tip pooling restrictions) as to the scope of the DOL restrictions on tip pools where the employer takes no tip credit and pays the employees the full minimum wage in cash. In Cumbie v. Woody Woo, Inc., d/b/a Vita Café, No. 08-35718 (9th Cir., Feb. 23, 2010), the court concluded that nothing in the FLSA restricts tip pooling arrangements where no tip credit is taken and the employer pays the participants the full minimum wage, even if the tip pool includes employees who do not “customarily and regularly” receive tips (back-of-the-house staff such as dishwashers and cooks) or where servers were asked to contribute a far greater amount than the limit set in the DOL regulation.

On Thursday, March 15, 2012, Attorney General Eric Holder signed a final rule extending the date for compliance with sections 242 and 1009 of the 2010 Americans with Disabilities Act (ADA) Standards for Accessible Design as it relates to the provision of accessible entry and exit to existing swimming pools, wading pools, and spas for a period of 60 days after the publication of the rule in the Federal Register. On that same day, the Attorney General also signed a Notice of Proposed Rulemaking (NPRM) seeking public comment on whether a longer period of time would be appropriate to allow pool owners and operators to meet their compliance obligations. Specifically, the NPRM proposes a 180-day extension of the deadline. Comments on the NPRM must be submitted on or before April 4, 2012.

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March 30, 2012 (Written By Seth McLaughlin – The Washington Post) – Sen. Marco Rubio threw his support behind Mitt Romney’s presidential campaign on Wednesday and pushed back against the other candidates’ plans to fight until the national convention this summer – handing the former Massachusetts governor a major endorsement from one of the stars of the conservative movement.

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