What you should know, as a tipped employee, about compensation laws. First, let’s define a few things. A tip is a gift or gratuity given by a customer as recognition for promptness or some sort of service provided. A tipped employee is considered to be a person that receives tips of more than $30 a month regularly.
Just in case you’re not familiar with the minimum wage law and where it comes from; here is a brief over view. The Fair Labor Standards Act (FLSA), also referred to as Federal Wage and Hour Law, sets the standards concerning minimum wage, equal pay for equal work regardless of sex, overtime pay, record keeping, and child labor. The Wage and Hour Division in the US Department of Labor administers the FLSA. See if you’re covered by FLSA here. In July 24, 2009 the Fair Minimum Wage Act set the federal minimum wage to $7.25.
Some States have set their own minimum wage and overtime laws. You can view a summary of the various states and their laws on minimum wage for tipped employees here. However, the FLSA requires that the law that pays the highest wage be used. That means a State can’t decide to pay less than the federal minimum wage, and if their laws are higher you get the higher wage.
In 1996 a Small Business Job Protection Act (SBJP) froze minimum cash wage required for tipped employees at $2.13 an hour! Which seems miserably low, and what happened to the minimum wage being $7.25 an hour? Didn’t we just discuss that you get to make no less than $7.25 an hour (under most circumstances there are some exceptions but that’s for another time.)
Let’s take a closer look and figure out how they accomplish this. So even though the SBJP act freezes cash wages at $2.13 an hour for a tipped employee, you actually have to make $7.25 an hour. How do they do this? It’s called tip credit. If an employer plans to use this method they’re required to notify you (the employee) of the minimum wage requirements and their plan to do the tip credit. What happens is the tips you earn have to make up the rest of the $5.12 an hour (2.13 + 5.12 is 7.25) to set you at minimum wage. The good thing is… if the tips you make for that pay period don’t make up that difference the employer is required to increase your pay to equal that of federal minimum wage. The down side of the deal is with states with $2.13 as the minimum cash wage means most or possibly even all of your tips could be used to make minimum wage, instead of being extra wages.