What all tipped employees need to know

As most restaurant servers could probably attest, working for tips means getting used to an uncertain income. Some days, you may go home with pockets full of cash,  but others … well, not so much.

Unfortunately, the potential for uneven pay has another serious downside. That is, tipped workers may be especially vulnerable to wage theft.

Why is that? Mainly because servers and bartenders are subjected to different compensation rules than other hourly employees. The lack of clear-cut, easily understandable pay guidelines makes it all too easy for some employers to take advantage of tipped employees.

In fact, that’s what a group of employees at Iron Hill Brewery claimed happened to them. They alleged that their employer cheated out them out of their rightful compensation by manipulating tip credit calculations. Finally, the company agreed to settle the suit for $1.3 million.

So what are tip credits? How do they affect tipped workers’ wages? What other ways might companies attempt to cheat tipped employees out of their rightfully earned pay? Let’s discuss.  

What is a Tip Credit?

The first thing to know is that tipped employees are generally considered those who receive $30 or more per month in tips.  

Tip credits play into the minimum wage calculation for tipped employees.  While tipped employees are still entitled to minimum wage, that amount may be achieved by adding together hourly wages that are paid by the employer, along with workers’ tips.

Under federal law, employers must pay tipped employees a regular hourly cash wage of at least $2.13 per hour, although some states may have higher rates. For example, in Pennsylvania, employers must pay tipped employees $2.83 per hour.

The cash wage for tipped workers is much lower than the regular federal minimum wage because it assumes that employees will make enough in tips to bring their hourly wages to the minimum wage level or above. This is called a “tip credit” because it allows the employer to take a credit against workers’ tips.

However,  employers are required to make up the difference if employees’ tips, once added to the regular hourly cash wage, do not rise to minimum wage level.

How Do Tip Credits Work?

Tip credits generally do not involve money changing hands. Rather, they usually show up as a line item on workers’ pay stubs.

Many times, this deduction is automatic. That means workers rarely have a chance to address discrepancies.

However, keep in mind that if you’re a server, bartender, or another kind of tipped employee in a Philadelphia-area establishment and you don’t make enough to meet the minimum wage level of $7.25, you may be entitled to additional money from your employer. New Jersey employees must make $8.44 per hour. 

If you work more than 40 hours in a given week and you’re a non-exempt employee, you’re still entitled to overtime—yes, even if you’re a tipped employee.

But here’s the catch: employers generally may not increase the amount of tip credits they claim for overtime hours, except in very limited circumstances.

The upshot: an employer could potentially have to pay even more cash out-of-pocket if hourly overtime levels of 1.5 times the regular rate of pay are not otherwise achieved through tips and the regular hourly cash wage.

Contact Us Now for a Free Consultation 

As this fact sheet from the U.S. Department of Labor shows, laws governing compensation for tipped employees can be extremely complicated. If you believe that you haven’t been paid in accordance with the law, it’s a good idea to speak to an attorney.  

Email us at murphy@phillyemploymentlawyer.com, or call (267) 273-1054 for a free consultation.