Paper Trails

What are the Federal Tip Credit Changes?

A few adjustments have been made to the federal tip credit, part of the Fair Labor Standards Act, under a new rule passed by the Department of Labor that takes effect December 28th.

What is the federal tip credit?

The federal tip credit allows employers that have tipped workers to pay a much lower percent, 50% in Maine, of minimum wage in direct wages to its’ tipped employees. Employers must prove that the employee makes at least minimum wage when direct wages and tips are combined at the end of the week. Under the federal tip credit, employers are also allowed a credit against the tips earned by the employee to make up the balance of minimum wage.

When can employers use the federal tip credit?

The new rule, that takes effect December 28th, clarifies when an employer is allowed to take the federal tip credit. The credit may only be taken when tipped employees perform labor that is part of their tipped occupation or doing tasks that “directly support” tip-producing work. Simply, employees MUST be doing service or tipped related work for an employer to use the credit.

For Example:

A server waiting on a table is considered tipped related work as it directly produces tips for that employee. Tasks such as rolling silverware, portioning condiments, cleaning, waiting for customers to arrive are not considered tipped related work. Employees must receive the full minimum wage during these times.

The second part of the rule states that employees that are doing work that “directly supports” tip-producing work for a substantial amount of time must be paid at full minimum wage. A substantial amount of time is considered 20% or more of an employees total hours worked in a week or work that exceeds 30 consecutive minutes. If an employee falls into this category, they must be paid for that work at the full wage.

Remember, the federal tip credit may also be used when tipped employees enter overtime.

For Example:

Maine 2023 Minimum Wage = $13.80 \ hr

Tipped Wage = $6.90 \ hr

Overtime wage: 13.80 x 1.5 (time and a half) = $20.70

Less Tip Credit (minimum wage – tipped wage) = $6.90

$13.80 X 1.5 = $20.70 – $6.90 tip credit= $13.80

Additional changes to the federal tip credit.

An earlier amendment to the tip credit rule, which took effect November 23rd, clarifies:

  • when tip pooling can occur among all restaurant staff.
  • when managers or supervisors can retain tips.

According to the updated ruling, tip pooling can occur for all restaurant staff, including those who do not normally receive tips (cooks, dishwashers, etc), only if all members of staff are paid at least the full minimum wage. Employers can not use the tip credit in this case. Employers, managers, and supervisors are also not eligible to participate in the tip pooling. Further, they cannot retain any portion of tips that other employees have earned. Employers, managers, and supervisors are allowed to contribute tips to the tip pool.

Employers, managers, and supervisors are only allowed to retain the tips that they “solely and directly” earned by performing tipped related work. According to the DOL, a manager or supervisor is considered anyone:

  1. whose primary duty is the management of the entire enterprise, a subdivision, or a department.
  2. who regularly directs the work of at least two other employees.
  3. who has the right to hire or fire other employees.

What to do to stay compliant?

To stay compliant to the above changes, employers should consider the following:

  1. Have two different rates of pay for tipped staff. Staff members should clock in at the full rate when performing work that is not considered tip-producing or work that “directly supports” tip-producing work. Employees can clock in at the tipped wage when performing tip-producing work. Employers can take the tip credit for those hours.
  2. Only provide tips to non-tipped staff via tip pooling if all staff is paid at least the full minimum wage. Do not use the tip credit if tip pooling among all staff. Further, do not have your managers and supervisors receive tips from tip pooling, even if they have contributed tips to the pool.
  3. Make sure managers and supervisors are only keeping tips that they received from tipped related work that they were “solely and directly” responsible for.

Please contact us if you have any questions or concerns regarding these changes.