The hospitality industry is a fast-paced sector that juggles a myriad of issues from high worker turnover to shortages of workers. 

In addition to these inherent challenges, the industry must also comply with a multitude of local, state, and federal laws and regulations—especially those regarding wage and hour considerations. 

How to Compensate Tipped Employees

Many employers in the hospitality industry employ individuals who are "tipped employees." A "tipped employee" is a worker who engages in an occupation that customarily and regularly receives more than $30 a month in tips. Below are a few tips to ensure employer compliance when compensating tipped employees.

Tip Credit

The Fair Labor Standards (the "FLSA") permits an employer to take a "tip credit" towards its minimum wage and overtime obligations for non-exempt, tipped employees. The North Carolina and federal minimum wage is $7.25 per hour. Employers claiming a tip credit are not exempt from minimum wage and overtime requirements.

The maximum tip credit an employer can claim per employee is $5.12 per hour in tips. This means that an employer must pay a tipped employee at minimum $2.13 per hour in direct wages ($5.12 + $2.13 = $7.25). If the employee's tips combined with the employer's direct wages of at least $2.13 per hour do not equal the minimum hourly wage, then the employer must make up the difference. For instance, if an employee only receives $3.00 per hour in tips, then the employer must compensate the employee an additional $4.25 per hour in direct wages to ensure the employee is paid at least minimum wage. 

Prior to taking a tip credit, an employer must provide its employees with a specific notice. Notice can be either written or oral, but it must inform the employee of the following:

1. The amount of direct wages the employer is paying the employee, which must be at least $2.13 per hour.
2. The amount claimed as tip credit, which cannot exceed $5.12.
3. The tip credit claimed cannot exceed the tips received.
4. All tips received by the employee are to be retained by the employee unless there is a valid tip pooling arrangement.
5. The tip credit will not be applied to a tipped employee unless they are informed of the above information.

Tip Pooling

Tip pooling is a common arrangement where employees share tips with other eligible employees. There are two tip pooling arrangements. First, the traditional tip pooling arrangement requires tipped employees to contribute tips only to a tip pool limited to employees who customarily and regularly receive tips (i.e., waiters, bussers, and service bartenders). A second tip pooling arrangement is when an employer pays its employees a direct wage of at least the minimum wage ($7.25) per hour and imposes a mandatory tip pooling arrangement on all employees—including non-tipped employees (i.e., cooks and dishwashers).

Employers Cannot Keep Tips

Regardless of how an employer compensates its tipped employees, the FLSA prohibits employers from keeping any portion of an employee's tip, and the employer cannot participate in a tip pooling arrangement. Further, an employer cannot require an employee to give their tips to the employer—even if a tipped employee receives at least $7.25 per hour in direct wages and the employer does not take a tip credit.

The FLSA extends the definition of "employer" to include managers and supervisors. A manager and supervisor includes any employee (a) whose primary duty is managing the enterprise or a department or subdivision of the enterprise; (b) who customarily and regularly direct the work of at least two or more full-time employees; and (c) who has the authority to hire or fire other employees, or whose suggestions and recommendations to hiring and firing decisions are given particular weight. Additionally, any individual owning at least a bona fide 20% equity interest in the business cannot keep employees' tips.

A manager or supervisor may only keep the tips they directly receive from a customer for the service they directly and solely provide. By way of example, even if a manager fills in for a tipped employee who misses a shift, the manager cannot participate in tip pooling.

Conclusion

Employers should closely monitor the payment of their employees. Improper payment or handling of tips can lead to costly penalties, administrative headaches, and lengthy and intrusive Department of Labor investigations. Employers should be knowledgeable of the rules concerning the application of the FLSA to their employees. Our team of experienced employment attorneys can provide guidance at every step—from evaluating whether an employee can participate in the tip pool to mitigating risks of noncompliance.