What is a Tip Credit?

A tip credit is an allowance that employers can take to offset the cost of paying their employees tips. The credit is typically a set percentage of the employee’s wages, and it can vary depending on the state in which the employer operates.

Checkout this video:

What is a Tip Credit?

A tip credit allows an employer to count a portion of an employee’s tips towards the minimum wage. The Fair Labor Standards Act (FLSA) allows employers to pay tipped employees a lower hourly wage, as long as the employee’s tips make up the difference. For example, if an employer pays a tipped employee $2.13 per hour, the employer can claim a $5.12 credit toward the minimum wage, for a total hourly wage of $7.25.

Federal and state law

The Fair Labor Standards Act (FLSA) does not require employers to pay their employees for time not worked, such as for vacations or holidays. However, the FLSA does require that covered, nonexempt employees receive not less than the federal minimum wage of $7.25 per hour for all hours worked in a workweek.

Under certain circumstances, employers may take a tip credit toward the minimum wage even if the employee has not received any tips. When an employer takes a tip credit, the employer must pay its employees at least $2.13 per hour in wages. The employer may then credit up to $5.12 per hour in tips towards its minimum wage obligations. This is called a “tip credit.” The employer cannot claim a tip credit unless it has informed its employees of the provisions of the FLSA that permit the use of a tip credit.

Most states have their own minimum wage laws that set rates higher than the federal level and some states also allow employers to take a tip credit. When state and federal law differ, employers must comply with the law that offers employees greater protection.

The definition of a tip

A gratuity (also called a tip) is a sum of money customarily given by a patron to certain service providers in return for the services they provide. For example, waiters and waitresses in restaurants usually receive tips from the patrons. Tipping is usually considered voluntary, although some jurisdictions have enacted laws that require employers to pay their employees a base wage plus customer tips.

In the United States, the Fair Labor Standards Act (FLSA) permits employers to take a “tip credit” towards their minimum wage obligations for tipped employees. This means that an employer can pay tipped employees a lower hourly wage than the minimum wage, as long as the employees receive enough in tips to make up the difference. The current federal minimum wage is $7.25 per hour, but the FLSA permits employers to pay tipped employees as little as $2.13 per hour, as long as the employees make at least $5.12 per hour in tips.

How is a Tip Credit Used?

A tip credit is an allowance that an employer can take to cover the cost of tips given to employees. The credit is often used in the service industry to help offset the cost of wages. The Fair Labor Standards Act (FLSA) allow employers to take a tip credit as long as the employee is making at least the minimum wage.

How to calculate the credit

To calculate the credit, multiply the minimum wage by the allowed credit percentage. For example, if the state minimum wage is $7.25 and the credit percentage is 50%, the credit would be $3.625 per hour (0.50 x $7.25). This would mean that an employer could pay a tipped employee as little as $3.625 per hour, as long as that employee made enough in tips to bring his or her hourly compensation up to at least $7.25 per hour.

How the credit is applied

A “tip credit” allows an employer to count tips towards its minimum wage obligations under the Fair Labor Standards Act (FLSA). The FLSA requires covered employers to pay workers at least the federal minimum wage of $7.25 per hour. To take advantage of the tip credit provision, an employer must pay its tipped employees a direct wage of at least $2.13 per hour, which is the current federal minimum wage for tipped employees set forth in 29 U.S.C.

As of May 2018, 29 states had laws on their books allowing employers to claim a tip credit, meaning that tips could be counted towards the minimum wage due to employees. The other 21 states had passed laws prohibiting employers from claiming a tip credit – meaning that tips could not be counted towards an employee’s minimum wage (and that the employer was responsible for making up any difference between the direct wage paid to the employee and the full minimum wage).

In order to qualify for a tip credit, an employer must notify its employees in advance that it plans to take advantage of the tip credit provisions of the FLSA. An employer who fails to provide this notice cannot take a tip credit with respect to those employees.

If an employee’s tips, combined with the employer’s direct wages, do not equal at least the federal minimum hourly wage of $7.25 per hour (or their state’s equivalent hourly rate), then the employer must make up the difference.

What are the Pros and Cons of a Tip Credit?

A tip credit allows employers to factor in tips as part of a server’s wages. The main advantage of a tip credit is that it allows employers to pay servers less than the minimum wage, as long as the servers make enough in tips to bring their hourly wage up to the minimum wage. The downside of a tip credit is that it can lead to lower quality service, as servers may feel like they have to work harder to make up for the lower hourly wage.

Pros

A tip credit allows an employer to pay tipped employees a lower hourly wage, as long as employees receive enough in tips to make up the difference between the lower wage and minimum wage. For example, if the minimum wage is $10 per hour and an employee is being paid $5 per hour under a tip credit, the employer can only claim the credit if the employee receives at least $5 in tips per hour, for a total compensation of $10 per hour. If the employee does not receive enough in tips to make up the difference, the employer must make up the difference.

Proponents of a tip credit argue that it incentivizes good service and helps businesses keep prices down for consumers. They also argue that tipped employees are typically paid more than non-tipped employees, once tips are factored in.

Critics of a tip credit argue that it can lead to lower wages for workers, since employers are allowed to pay them less per hour. They also argue that tipped workers are more likely to experience sexual harassment and other forms of mistreatment from customers, since they may feel they need to put up with it to keep their job.

Cons

While the Fair Labor Standards Act (FLSA) does allow employers to claim a “tip credit” against their minimum wage obligations, this provision is not without its critics. Some of the cons associated with claiming a tip credit include:

-Employees may end up earning less than minimum wage if their tips don’t make up the difference.
-The tipped employees may have less job security because their wages are lower.
-There is potential for abuse if employees are required to share their tips with management or non-tipped staff.
-It can be hard to tracktips and ensure that all employees receive their fair share.

What are the Alternatives to a Tip Credit?

A tip credit allows an employer to pay a tipped employee a lower hourly wage than the standard minimum wage, as long as the tips the employee earns brings their hourly wage up to the minimum wage. The tip credit is only applicable to certain occupations, such as servers in restaurants. Some states have done away with the tip credit altogether, while others have implemented an alternative to the tip credit.

Alternatives for employers

In general, there are three ways for an employer to comply with the FLSA’s minimum wage and overtime provisions with respect to tipped employees:

1) pay a direct wage of at least the full FLSA minimum wage to all employees who perform tipped work, in addition to any tips received;
2) utilize the “tip credit” provisions of the FLSA, which allow an employer to take a credit against its minimum wage obligations equal to a specified percentage of the tips received by its employees; or
3) adopt a combination of these two methods.

The third option – a combination of paying a direct wage and taking a tip credit – is available only if the employer can establish that its tipped employees actually receive more than the minimum wage when their tips and direct wages are combined. If an employer claims a tip credit, it must notify each employee in advance that it intends to do so and must be able to show that each employee’s tips combined with direct wages equal at least the minimum wage.

Alternatives for employees

There are a few alternatives to the tip credit that employers can use to ensure that their employees are fairly compensated. One option is to pay employees a base wage that is high enough to cover the cost of living, without relying on tips to supplement their income. Another option is to pay employees a lower base wage, but also provide them with a percentage of the profits from the business. This ensures that employees will still be able to earn a livable wage, even when business is slow. Finally, some employers choose to create a hybrid system, where employees are paid a base wage plus a smaller percentage of tips. This allows employees to earn a livable wage, while still providing an incentive for them to provide excellent customer service.