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Employers Beware: Tips Are Always the Property of Tipped Employees
December 18, 2019
Parsons Behle & Latimer Legal Briefings


It has long been the case that where employers take a tip credit, they may not keep any tips received by employees. But what about employers that do not take a tip credit?  

Until recently, employers who did not take a tip credit were legally permitted under federal law (but not under some state laws) to keep tips received by their employees. This law changed last year when Congress amended two provisions in the Fair Labor Standards Act (FLSA). This amendment explicitly prohibits employers from keeping tips received by employees. The amendment applies to all employers, regardless of whether they take a tip credit, and creates a private right of action to recover unlawfully retained tips.In response to this amendment, on Oct. 7, 2019, the Department of Labor (DOL) announced a new proposed rule and opened a public comment period on the proposed rule. The public comment period just closed on December 11, 2019.  We will report on the final rule in this newsletter, once the rule is published. 

In the meantime, a brief refresher on the FLSA’s tip credit may be in order. 

The FLSA’s Tip Credit 

The FLSA requires employers to pay non-exempt employees at least a specified minimum wage (currently $7.25 per hour) for the first 40 hours and one-and-one-half times that wage for every additional hour worked in a workweek. The FLSA has a special provision that allows employers of tipped workers (those who work in a job in which they customarily and regular receive at least $30 per week in tips), to partially satisfy this requirement by taking a credit for tips actually received by tipped workers. Such employers may take the tip credit if they pay their tipped workers at least $2.13 per hour in wages and the tipped workers receive at least the difference between their hourly wage and the federal minimum wage in tips. If an employee's actual tips plus their cash wages equal less than the applicable minimum wage, the employer must make up the difference with additional cash wages.  

Employers taking a tip credit must also satisfy two additional conditions: (1) They must inform their tipped workers about the tip credit and (2) They must allow the tipped workers to retain all the tips they receive (subject to employee tip pooling arrangements). If an employee performs two jobs, one in a tipped occupation and one in an untipped role (for example, a salon stylist who also works as the salon's bookkeeper), an employer may take a tip credit against only those hours worked by the employee in the tipped occupation. 

Informing Tipped Workers 

Employers that choose to take a tip credit must first inform tipped employees about the following things: 

  • The amount of the cash wage the employer pays tipped employees (currently at least $2.13 per hour under federal law—but more under various state laws);
  • The additional amount claimed by the employer as a tip credit (currently capped at $5.12 per hour under federal law—but capped at lower levels in certain states);
  • That the tip credit claimed by the employer may not exceed the amount of tips actually received by a tipped employee;
  • That all tips received by a tipped employee are to be retained by the employee except for a valid tip pooling arrangement limited to participation by employees who customarily and regularly receive tips;
  • That an employer may not keep employee tips for any purpose, including allowing managers or supervisors to keep any portion of employee tips, regardless of whether the employer takes a tip credit; and
  • That the tip credit does not apply to any tipped employee unless the employee has been informed of these tip credit provisions. 

The notice does not need to be in writing. However, employers would be wise to provide the notice in writing and to require employees to sign an acknowledgment that they have received and understand the notice.

 Employers who do not comply with the tip credit notice requirements, including providing the notice in advance of claiming any tip credit, may be liable to tipped employees for cash wages equal to the full minimum wage for all hours worked. 

State Law Complications 

Application of the tip credit is complicated by differing state law standards. For example, Utah law does not impose any different state standard, so Utah employers may take a tip credit under the federal requirements. In contrast, Idaho permits employers to take a tip credit, but requires employers doing so to pay a minimum cash wage of $3.35 (rather than $2.13), and Montana and Nevada prohibit tip credits altogether. So employers must check the laws of the states in which they operate to determine in which states they may take a tip credit and what requirements they must meet in order to do so. 

To discuss this or other employment-related questions, contact Mark Wagner at (801) 532-1234 or send an email to mwagner@parsonsbehle.com.

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