On June 23, 2015, the Montgomery County, Maryland, Council passed Bill 24-15 (“Act”), freezing the county’s minimum wage for tipped employees at $4.00 per hour, effective July 1, 2015. This prevents an increase that otherwise would have occurred under the prior formula for determining the amount of tip credit that an employer may use to calculate the minimum wage for tipped employees working in the county.

Wage Computation

Although Montgomery County’s minimum wage law requires that a tipped employee be paid the county’s minimum wage, the employer may subtract a tip credit from the required minimum hourly wage. Previously, the maximum tip credit was equal to the county’s minimum wage less 50 percent of the (lower) state minimum wage. Prior to July 1, 2015, Maryland’s minimum wage was $8.00 and Montgomery County’s minimum wage was $8.40. Thus, an employer was only required to pay tipped employees a base rate equal to half the state’s minimum wage, i.e., $4.00, with an obligation to compensate the difference up to the county’s minimum wage when tipped employees do not earn enough in tips. Notably, this was already more than the state’s tip base of $3.63. However, with the state’s minimum wage increasing to $8.25 on July 1, 2015 (and more in future years), Montgomery County’s new tip base would have risen to $4.13, while the state’s tip base remained at $3.63. The Act avoids this increase and future ones by replacing the 50-percent formula with a simple flat base rate of $4.00 for tipped employees, effective July 1, 2015.

New Reporting Requirements

The Act also creates a new requirement for employers employing tipped workers in Montgomery County to submit to the Director of the Office of Human Rights quarterly wage reports within 30 days following the end of each quarter, certifying that each tipped employee was paid the required minimum wage.

The Act further directs the County Executive to establish an optional online reporting system to submit the quarterly wage reports.

Who Benefits?

By freezing Montgomery County’s tip minimum wage at $4.00 per hour, the Act eliminates any confusion associated with whether future minimum wage increases would also increase the minimum base pay for tipped workers. Further, the Act avoids putting the county’s employers at a greater competitive disadvantage regarding regional tip minimum wages. Montgomery County’s tip wage already is more generous than the frozen tip minimum wage of $3.63 per hour in the rest of Maryland, the tip minimum wage of $2.77 per hour in the District of Columbia, and the tip minimum wage of $2.13 per hour in Virginia.

What Should Employers Do Now?

• Revise policies to ensure compliance with the Act.

• Make sure that tipped employees are aware of the Act and its impact on tip minimum wages.

• Submit quarterly wage reports to the Director of the Office of Human Rights.

• Ensure that shortfalls in tips are made up to meet the county’s minimum wage of $8.40.

Gregory D. Green, a Summer Associate, contributed to the preparation of this Advisory.