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New Federal Regulations for Tipped Employees

Posted by: Today's Tip Contributor on May 16, 2011

The U.S. Labor Dept. issued new regulations for the Fair Labor Standards Act (FLSA) that affect businesses that have tipped employees. These regulations became effective on May 5. Here are some compliance pointers.

Under federal law, an employer may take a "tip credit" equal to the difference between the minimum cash wage for tipped employees, which is $2.13 per hour, and the federal hourly minimum wage, which is $7.25, but only if the tip credit does not exceed the amount of the tips the employee actually receives. Employers must comply with both federal and state law tip requirements. If state law tip requirements are more stringent than federal law, state law requirements will generally control. To avoid a dispute, keep a written record of the information you provide to employees about the tip credit, signed by each employee. In addition, the new rules prohibit employers from using employee tips for any reason other than a valid tip pool, which cannot include employees who do not usually receive tips, such as dishwashers and cooks.

To claim the tip credit, you must inform employees, in advance, of the following:

• The cash wage they’ll be paid;

• The tip credit formula;

• That the tip credit may not exceed the actual amount of tips they receive;

• They must be able to keep all tips they receive except for contributions to a valid tip pool limited to employees who customarily and regularly receive tips; and

• The tip credit may not be taken unless they have been informed of the tip credit requirements.

The notice is not required to be written, but if you intend to take a tip credit, you should put it in writing and have employees acknowledge receipt, to prove compliance. Please also note the current FLSA recordkeeping regulation requires that the amount per hour the employer takes as a tip credit be reported to employees in writing each time it is changed from the hourly amount taken in the preceding week.

Make sure your pay policies also comply with state laws, which often differ significantly from the FLSA.

Lisa A. Schreter
Littler Mendelson

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