Minimum Wage for Tipped Employees

Cutting costs. It’s the name of the game these days. While it may be tempting to view payroll as a budgetary line item on par with all other line items -- like office supplies, for example -- doing so can be a mistake. Copy paper and staplers can’t get upset and file a lawsuit for violating their rights -- workers whose wages have been cut certainly can, and do. Ensuring that wages are calculated correctly is vital, both for workers and for businesses.

Workers’ wages are regulated by a number of laws, but one of the most important ones is the Fair Labor Standards Act (FLSA). In addition to setting the minimum wage rate, this law and the regulations that go along with it set forth all kinds of requirements related to the proper payment of wages. In this series, Athens employment attorney Penn Dodson describes in layman’s terms some of the common ways employers fail to comply with correct wage paying procedures.

Part I: Minimum Wage for Tipped Employees

The current minimum wage, effective July 24, 2009, is $7.25 per hour. However, employers are still allowed to pay tipped employees $2.13 per hour, if certain conditions are met. One of those conditions is that the employee must actually be earning at least minimum wage each workweek, between the $2.13 per hour and the money earned as tips. Where a tipped employee’s total wages (i.e. the employer-paid sub-minimum wage amount plus the customer-paid tips) does not equal an average hourly wage equal to or greater than the applicable minimum wage, the employer must pay the worker for the difference. 29 U.S.C. § 203(m).

With the combination of minimum wage having increased and in many cases sales being down, there are more and more cases lately of tipped employees not receiving enough in tips to make minimum wage. Where it was once the case that an employer could fairly presume that, by and large, tipped employees were receiving enough to meet minimum wage, these days employers can no longer safely make that assumption.

Employers are able to enjoy the benefit of the “tip credit” which allows them to pay the employees less than the applicable minimum wage for hours worked. A “tip credit” is the difference between the applicable minimum wage and the rate of pay the tipped employee earns as an hourly wage from the employer (the lowest it can be is $2.13, but sometimes employers pay some other rate) which the employee earns in tips. That benefit, however, comes with the responsibility of keeping accurate account of the tips received. Because of this tip credit benefit, it is the employers’ responsibility to maintain records supporting the tip credits from which they benefit. If they are unable to substantiate the tip credits, they lose their ability to enjoy the benefit of the tip credit.

The IRS requires that employees report all of their tips. Of course, at least in some circles, especially where cash tips are the norm, underreporting of tips is common. To some degree that is an issue between the employee and the IRS. However, to the extent that any such suspected tip underreporting affects wage law requirements, employers have an incentive to ensure that employees are in fact reporting all of their tips.

An employer suspecting its workforce to be underreporting tips should first educate and remind employees of their obligations, perhaps through memos, employee meetings, or other suitable formats for issuing policy directives. If the employer still suspects that this is not being done, the employer should establish a protocol for tip counting at the end of workers’ shifts, such as by a supervisor. If there is still a problem and the employer becomes aware of actual underreporting, disciplinary measures may be appropriate for failure to abide by the prescribed policies. Where reported tips are not meeting or exceeding the tip credit amounts, however, there are actions that an employer ought not take, such as withholding tips from employees, requiring employees to sign something suggesting that they are earning a certain amount in tips that they are not in fact earning, etc.

Employers need to ensure that tips are reported accurately at the time they are being earned. If employers don’t track tips accurately at the time they are earned, it is difficult, if not impossible, to retroactively go back and recreate accurate records. Employers also cannot retroactively, after the day, week, or pay period, make blanket generalizations to the effect that the servers must have received more than a certain amount and, on that assumption, fail to pay the difference between the reported tips plus paid wages and minimum wage. In other words, an employer is stuck with the numbers contained in its records. If the employer’s records do not support a sufficient amount of tips, then they should be paying the difference.

In sum, tipped employees, like other hourly-paid workers, have to be earning at least minimum wage, and the employer has to be able to point to records giving evidence that that is in fact happening. If they can’t, employers need to pay the difference.

For more information on wage and hour laws, contact Penn Dodson at 706.548.8668 pud@classiccitylaw.com or see the US DOL website:

http://www.dol.gov/esa/whd/regs/compliance/whdfs15.pdf

Calculating Workers’ Overtime Wages Correctly in Tough Economic Times

Ensuring that wages are calculated correctly is vital, both for workers and for businesses. Employers and employees alike are almost universally aware that for most hourly-paid employees, hours over 40 worked in a workweek must be paid at a rate of time and a half the worker’s regular hourly rate. As simple as that concept may sound, however, errors related to overtime pay occur on a frequent basis, in any number of different ways. There are all kinds of variables and factors that potentially can make a difference as to whether overtime is owed and if so, how to calculate it. Following are a few pointers related to the calculation of overtime for nonexempt employees. While the list is far from exhaustive, it should at least provide food for thought about some of the common pitfalls.

1. Even if employees aren’t supposed to work overtime, they still have to be paid for it.

Employers trying to watch their bottom lines by reducing the amount of overtime worked often create “no overtime” rules. Employees may indeed properly be directed not to work more than 40 hours in the workweek, generally speaking. However, the methods employers use to enforce these kinds of rules can sometimes get them into trouble.

Where an employer tries to enforce a no-overtime rule by not paying for overtime worked, generally they are violating the law. Time worked must be paid, plain and simple.

That does not mean, however, that employers are powerless to enforce their rules. If an employee works unauthorized overtime, the correct response should be to pay the employee for that overtime but then issue him or her corrective discipline to ensure that it does not occur again.

Workers should not, however, be reprimanded for incurring overtime because they were directed to work more than 40 hours in that particular workweek. Employers should not issue blanket no-overtime rules on the one hand but then during the workweek direct employees to work more than 40 hours on the other and then scold them for doing so.

2. Overtime is calculated by the workweek, not the pay period.

Some employers mistakenly believe that if an employee works 60 hours in the first week of a two week pay period and 20 hours in the second week, then the worker can be paid straight time for 80 hours of work. Some even go farther than that and run ongoing “comp time” type systems. The vast majority of the time, these systems are impermissible. Although “comp time” systems can be permissible for certain governmental employers, generally for private employer hourly workers, they are improper.

The FLSA “takes a single workweek as its standard and does not permit averaging of hours over 2 or more weeks.” 29 C.F.R. §778.104. In the first example, the employer should pay 20 of the total 80 hours worked at the overtime rate because the employee worked 20 overtime hours in the first workweek of the pay period. In most circumstances, the “workweek” is the unit from which to determine whether and how much overtime pay is owed.

3. The correct overtime rate for a $2.13/hr tipped employee is NOT $3.20/hr.

Overtime rates for tipped employees are calculated wrong all the time. When a tipped employee paid at $2.13 per hour works more than 40 hours in a workweek, his or her overtime rate is not $2.13 x 1.5 = $3.20. By law, tipped employees should have their overtime rate calculated as follows: minimum wage times time-and-a-half minimum wage, minus the applicable “tip credit.” 29 C.F.R. § 531.60(a). Thus, for example, for a server whose hourly rate is $2.13 per hour, the applicable overtime rates should have met or exceeded the following rates:

Tipped Employee Overtime Rates
	pre-7/24/07	7/24/2007	7/24/2008	7/24/2009
Min Wage	$ 5.15	$ 5.85	$ 6.55	$ 7.25
Min Wage x 1.5	$ 7.73	$ 8.78	$ 9.83	$ 10.88
Wage	$ 2.13	$ 2.13	$ 2.13	$ 2.13
Tip Credit	$ 3.02	$ 3.72	$ 4.42	$ 5.12
OT rate	$ 4.71	$ 5.06	$ 5.41	$ 5.76

These are just a sampling of some of the issues that can come up in the context of overtime law and should be construed as general guidelines, not legal advice. Every business is different, and in order to figure out proper compliance with the rules, the specific circumstances of the operation and positions should be addressed individually. For more information on wage and hour laws, contact Penn Dodson at 706.548.8668 pud@classiccitylaw.com or see the US DOL website: http://www.dol.gov/whd/regs/compliance/whdfs23.pdf