What All Tipped Employees Need to Know About Tip Credits

Disney World employee suing over allegedly unfair pay deductions

Believe it or not, even people who work at the so-called happiest place on earth have their complaints.

A restaurant worker at a Disney World resort is suing the company, claiming that her employer unlawfully deducted tip credits from her pay.

However, if you’re a tipped worker and you don’t know what a tip credit is, you’re not alone.

Because tipped workers are governed by different pay requirements than salaried or hourly employees, it can be particularly confusing to figure out what employers can and cannot deduct from your paycheck.

If you work for tips, here’s a primer on some things you should know about your rights to fair compensation.

Who counts as a tipped employee?

Tipped employees are generally considered those who receive $30 or more per month in tips.

Are tipped employees still entitled to minimum wage?

Yes, but that figure may be computed from multiple sources.

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

The cash wage is much lower than minimum wage because it assumes that employees will make enough in tips to bring their hourly wages to the minimum wage level or above. However, if employees’ tips do not rise to minimum wage level, employers are required to make up the difference.

In Pennsylvania, tipped employees must make at least $7.25 per hour after combining cash wages and tips. New Jersey employees must make $8.38 per hour.

What is a tip credit?

Tip credits pertain to the minimum wage calculation. A tip credit allows an employer to “credit” some of the employees’ tips toward the employer’s obligation to pay minimum wage.

This doesn’t mean that the employer physically collects that money from the employee. Rather, the “credit” allows the employer to pay the lower hourly cash wage we discussed above. The tip credit usually shows up as a line item on the worker’s pay stub.

For example, in Pennsylvania, the cash wage for employees is $2.83 per hour. Minimum wage is $7.25. That means employers can claim a maximum tip credit of $4.42 against minimum wage. (That is, $7.25 – $2.83 = $4.42.)

In New Jersey, the cash wage for employees is $2.13 per hour. Minimum wage is $8.38. That means New Jersey employers can claim a maximum tip credit of $6.25 against minimum wage. (That is, $8.38 – $2.13 = $6.25.)

The amount of tip credits claimed by the employer cannot exceed the actual amount of tips received by the employee. So if tipped employees do not make enough in tips to reach minimum wage levels for their states, employers must make up the difference.

Are tipped employees entitled to overtime?

Yes. Just like most non-exempt workers who are covered by the Fair Labor Standards Act, tipped employees are generally entitled to receive time-and-a-half for any hours worked over 40 hours in a given week.

How are tip credits affected by overtime?

Employers may not increase the amount of tip credits for overtime hours. That is, if an employer normally takes a tip credit of $4.42 per hour, that rate cannot be increased for overtime hours.

Is it ever OK for employer to take a portion of workers’ tips?

Federal law states that tipped employees cannot be made to turn over their tips for any reason other than a valid tip pool. A tip pool is when tipped employees combine their tips and then divide them amongst themselves.

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.