TOP TIP: Make Sure to Provide Those Tip Credit Notices to Tipped Employees!

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A recent case reminds employers of the need to provide notice to tipped employees if they intend to use tip credits towards their minimum wage obligation, in accordance with the Fair Labor Standards Act.

Under the FLSA, an employer may 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 ($7.25/hour). Tipped employees are defined as those who customarily and regularly receive more than $30 per month in tips.

In order to use the tip credit, employers must provide the following information to a tipped employee:

  • 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.

In Valle v. Gordon Chen’s Kitchen, LLC, the employer failed to provide the required notice to its tipped employees, although it applied the tip credit. Therefore, the federal court found that, under the FLSA, the employer was not entitled to take a tip credit and was responsible for paying the full minimum wage rate, instead of just the lower tipped wage rate. In addition, because the employer had used the lower tipped wage rate to calculate overtime, it was also liable for the difference between the lower tipped overtime rate and the full overtime rate. Moreover, it was liable for liquidated damages because the failure to provide the tip credit notice was not reasonable.

As is clear from this case, the consequences for failing to provide the required tip credit notice can be significant – and easily avoided! While the DOL states that the notice may be provided either in writing or orally, we strongly advise that it be provided in writing so that there can be no argument about whether it actually was given to the employee.