Is Your Restaurant’s Hourly Pay and Tip Pool Practice Lawful?

Kollman & Saucier
Kollman & Saucier

A common misconception in the food service industry is the thought that there is a “server’s minimum wage.”  To be clear, there is no server’s minimum wage.  There is the federal minimum wage, currently $7.25 per hour, set by the Fair Labor Standards Act (“FLSA”), and some states have a higher state minimum wage.  In Maryland, for example, the minimum wage as of January 2023 will be $13.25 per hour (through December 31, 2022, the state’s minimum wage is $12.50 per hour).[1]  In the restaurant industry, however, employers often think that tipped employees (most commonly servers, bartenders, and other wait staff) are entitled to earn less as an hourly wage due to the so called “servers’ minimum wage;” that thought is false.  What is often mislabeled as a reduced minimum wage is actually the “tip credit.” 

The tip credit is found under the FLSA, where the law states employers of individuals who earn at least $30.00 or more in tips each month may reduce the hourly wage paid to tipped employees below the mandated minimum wage because employees’ tips, in conjunction with the reduced hourly wage, meet minimum wage standards.  See 29 U.S.C. 203(m)(2)(A).  Many states (including Maryland) have recognized the FLSA’s tip credit in their own minimum wage laws.  In essence, the employer may pay their tipped employees less than the mandated minimum wage because the total sum of money received through an hourly wage and earned tips meets or exceeds minimum wage.

Employers who take advantage of the tip credit are still required to pay employees a set hourly wage.  Under the FLSA, that minimum threshold is $2.13 per hour.  Under state laws, the minimum amount varies.  In Maryland tipped workers must receive at least $3.63 per hour; Delaware: $2.23 per hour; Pennsylvania: $2.83 per hour; Virginia: $2.13 per hour; Washington D.C.: $5.05 per hour.  Additionally, employers must account for and provide a statement to each tipped employee showing the tips they actually received in order to ensure that the employee’s total compensation is at least the mandated minimum wage.  The employer is required to make up the difference in hourly wage if an employee does not earn enough tips to meet the applicable minimum wage.

Tip credits are risky business when not applied correctly.  Lawsuits under the FLSA and state wage and hour laws can lead to awards for back wages, interest, double or sometimes triple damages, costs, and attorney’s fees.  Indeed, wage and hour plaintiffs’ firms specialize in finding aggrieved employees to file suit for low amounts of unpaid wages in order to achieve six figure payouts due to the costs associated with the lawsuit.  Restaurants often find themselves in the crosshairs of these firms.

Where restaurants often run afoul with the tip credit, and open themselves to costly litigation, is in tip pools or instances where tips are shared among groups of employees.  In a tip pool, the regulations prohibit any employee other than tip earning positions to receive tips from the pool of shared tips.  The only exception to this rule is if an employer pays its tipped employees the actual minimum wage.  In that case, the employer may disperse tips from a tip pool to non-tip earning workers (e.g. the kitchen staff), but that allowance is limited to only certain positions.

Under FLSA regulations, employers, supervisors and management may never accept tips from the tip pool.  Under the DOL regulations, a supervisor or manager is defined as an individual “whose primary duty is management of the enterprise…; who customarily and regularly directs the work of two or more other employees; and has the authority to hire or fire other employees” or whose suggestions and recommendations are given particular weight related to the status of employees. 29 CFR § 541.100(a)(2-4).

There is only one circumstance where a manager/supervisor may accept and keep a tip: when they are solely and directly responsible for earning the tip.  In other words, if anyone other than a supervisor assists a tipping customer, the tip cannot go into the supervisor’s pocket, they cannot receive from a tip pool, and simply must be compensated as either a salary or strictly hourly employee, and at a rate that meets or exceeds minimum wage. 

The owner/employer is also legally barred from taking money from the tip pool or otherwise having a share in tipped employees’ earned tips.  Tips are considered property of the employee, and while a restaurant owner may manage the tip pool and account for tips for wage statement purposes, the employer may not deduct from tips.  Doing so is an unlawful wage deduction under the FLSA.

Restaurant owners need to be aware of what the law requires when it comes to minimum wage, otherwise they risk stiff penalties in the form of fines and high liability to aggrieved employees.  Accordingly, pay practices should be reviewed to ensure they are consistent with Department of Labor Guidance, the FLSA and its regulations regarding tipped employees, and state wage and hour laws.

[1] A total of 18 states, Alabama, Georgia, Idaho, Iowa, Indiana, Kansas, Kentucky, Louisiana, Mississippi, New Hampshire, North Carolina, North Dakota, Oklahoma, South Carolina, Tennessee, Texas, Utah Wisconsin, and Wyoming either have a minimum wage law that matches the FLSA’s minimum wage, or do not have a minimum wage law and solely follow the FLSA.

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