Is $2.13 An Hour Enough? Higher State Minimum Wage Rates Impact Tip Credit
While employers nationwide have dreaded the inevitably increase in
the federal minimum wage under the Fair Labor Standards Act ("FLSA"),
several states forged ahead and raised their own minimum wage rates.
Now that employers are making adjustments in their payroll systems
based on the increased federal minimum wage to $5.85 per hour, those in
the restaurant industry should take this opportunity to examine how
increased federal and state minimum wages impact the wage calculations
for tipped employees.
What Is Tip Credit?
Many employers in the hospitality industry rely on the "tip credit" to
comply with the federal minimum wage. Generally, if an employer
implements a proper tip credit arrangement under the FLSA's
requirement, it can pay a qualifying employee as low as $2.13 per hour
if it can demonstrate that the employee receives at least $5.85 per
hour when this payment is combined with his or her tips (i.e., amounts
paid at a customer's discretion with respect to whether, in what
amount, and for whom the tip is left).
Is Tip Credit An Option?
Not all states allow employers to take a tip credit when it comes to
the state's minimum wage. Particularly concerning are those states that
have minimum wage rates above $5.85 per hour applicable to most
employees. For example, Alaska, California, Minnesota, Montana, Nevada,
Oregon, and Washington all have higher minimum wage rates and do not
allow any tip credit. Therefore, even if an employee qualifies for the
tip credit under federal law, the employee's non-tip wages must equal
or exceed the higher minimum wage rate in these states.
How Much Tip Credit Can You Take?
On the other hand, some states allow employers to take a tip credit
such that an employer can pay qualifying employees the stated lower
wage rate if they receive the required minimum wage when this amount is
combined with their tips. Specific requirements for determining whether
an employee qualifies as a "tipped employee" under state law might vary
from federal law. Moreover, the amount of tip credit available (and
correspondingly the amount of non-tip wages due) can vary. For example,
Delaware only requires non-tip wages of $2.23 per hour (maximum tip
credit $4.42 per hour), but Hawaii requires employers to pay at least
$7.00 per hour in non-tip wages (i.e., the maximum tip credit is only
$0.25 per hour).
Additionally, while some states provide an exact non-tip wage rate
(similar to the FLSA), others provide an exact tip credit amount such
that the minimum non-tip wage rate increases by the exact amount that
the minimum wage increases. To illustrate, Colorado's maximum tip
credit is set at $3.02 per hour based on a constitutional provision.
Currently the state's minimum wage is $6.85 per hour, which means that
the minimum non-tip wage rate is $3.83 per hour. However, if the
minimum wage were to increase next year by $1.00 the maximum tip credit
still would be set at $3.02 per hour such that, under those
circumstances, the state's minimum non-tip wage rate would increase to
$4.83 per hour. Accordingly, employers should watch for changes in the
tip credit/non-tip wage rates as well as the state minimum wage.
Finally, in those states that have a higher tip credit than $3.72,
employers must be careful not to ignore the application of federal law.
Employers are required to comply with both state and federal law unless
otherwise exempt and generally speaking should apply the most favorable
applicable provision. Please consult your attorney to determine under
what circumstances you can pay less than the federal or state minimum
wage.
Download
State-by-state chart showing the minimum wage requirement and maximum tip credit amounts for each jurisdiction.
Click here to go to the download page.
Caroline Brown is a lawyer with Fisher & Phillips LLP, a nationally recognized firm representing management in labor and employment matters. She can be reached at cbrown@laborlawyers.com
or at (404) 240-4281. This information provided is general and
educational and not legal advice. For additional information go to www.hospitalitylawyer.com.