Are You Applying the “Tip Credit” to Your Employees’ Wages Correctly?

Contributed by Heather Bailey

The Federal Labor Standards Act allows employers to pay their employees who regularly and customarily receive more than $30 a month in tips a reduced wage under the existing minimum wage (this is commonly known as taking a “tip credit”). However, problems occur when the employer applies the tip credit during all hours of the employees’ shifts, even though they may be performing dual jobs – one job that generates tips and another that does not. For example, a bartender or server may make coffee or set tables incidental to their tip generating duties, and thus can be compensated by using the tip credit even when performing such duties. However, employers need to know what to do when these incidental jobs or other non-tip generating duties take up a substantial amount of an employee’s work day. When this happens, an employer does not get the benefit of paying the reduced wages for time spent doing the other work.

The U.S. Court of Appeals for the Eighth Circuit in Fast v. Applebee’s now gives employers more guidance. Here, the appeals court upheld the district court’s reliance on a 1988 U.S. Department of Labor Wage and Hour Division Field Operations Handbook that provides that the tip credit may not be given “where the facts indicate that specific employees are routinely assigned to maintenance, or that tipped employees spend a substantial amount of time (in excess of 20 percent) performing general preparation work or maintenance….” Section 30d00(e).

The employees argued that their non-tip generating duties (i.e., wiping down bottles, cutting fruit, taking inventory and cleaning up after closing) consumed a substantial amount of their shift, and, consequently, Applebee’s should not be allowed to pay them a reduced hourly rate when performing these duties. The appeals court stated that the Department of Labor’s 20% rule should be followed when assessing such claims.

Practice Tips:

  • Assess the duties performed by your tipped employees to see if they are incidental to the tip-producing duties, or if they take up 20% of more of the employees’ work day.
  • Keep accurate records, such as job descriptions, which support that the employees’ duties are related to and intertwined with tip-generating and anything else is just incidental.

Please note that some states have different tip credit laws that differ from federal law and should be consulted in order to make sure you comply with state law as well.