Twelve Common Errors in Overtime Pay: Manipulation of the Tip Credit

Kevin D. Fitzpatrick, Jr. : March 25, 2012 1:29 pm

The Fair Labor Standards Act (FLSA) establishes minimum wage, overtime pay, record-keeping and youth employment standards for workers in the private sector and government.  Covered non-exempt workers are entitled to overtime pay of at least 1.5 times regular pay if they work more than 40 hours per week.

Another common problem area:

11. Manipulation of the Tip Credit

Employers of waiters, bartenders, busboys and other traditionally tipped employees are governed by a niche in the law called the tip credit, which allows the employer to reduce the minimum hourly wage paid to these employees by $5.12 per hour.  This results in an effective hourly wage of $2.13 (i.e., $7.25 – 5.12 = $2.13).  Employers sometimes require that the tipped employees participate in a “tip pool”.  A tip pool defeats the tip credit (resulting in a $7.25 per hour minimum wage) under the following conditions:

a)      If the tip pool is paid to an employee who is not traditionally tipped (for example, dishwashers, janitors, chefs, washroom attendants, managers).

b)      If an employer takes anything out of an employee’s tips other than a lawful tip pool.

If either of the above occurs, the employer is liable to the employee for the value of the tip credit ($5.12 per hour), a like amount as liquidated damages, and the employee’s attorneys’ fees.

Sometimes employers use the tip credit to pay overtime hours.  Overtime at the minimum wage is $10.88 ($7.25 x 1.5).  For tipped employees, the correct overtime rate is $5.76 (i.e., 10.88 – 5.12).  Many employers mistakenly inflate the tip credit to $7.68.  (i.e., 5.12 x 1.5) resulting in the incorrect overtime rate of $3.20.  This, too, can be a very costly mistake for an employer.

If you are an employer or an employee and have questions about the Fair Labor Standards Act, call the FLSA experts at DeLong, Caldwell, Bridgers, Fitzpatrick, & Benjamin, LLC, Charles Bridgers and Kevin Fitzpatrick, at (404) 979-3150 for a free consultation.  For more information, check out our publication,  Are You Entitled to Overtime Pay?

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