In the hospitality and service industries (most notably, restaurants), many non-exempt employees are tipped employees. Often, these employees are paid using a tip credit. A tip credit allows the employer to pay an employee at a rate below the minimum wage and use tips to make up the difference.
One common question that comes up with tip credit employees is how to calculate their overtime rate of pay. Is it calculated by multiplying their lower hourly rate by 1.5? Or is there another way? Today, we will show you how the overtime rate of a tip credit employee must be calculated in order to comply with federal, state, and city law.
For purposes of answering today's FAQ, we will use the example of a server in a restaurant in the Chicago suburbs. If our waiter in the Chicago suburbs works 45 hours in a week, there is a right and a wrong way to calculate the server's overtime rate. Here are the two keys. First, the tip credit overtime rate must be paid on the minimum wage, not the lower tip credit hourly rate. Secondly, an employer cannot take a larger tip credit for an overtime hour than for a straight-time hour.
Under the Illinois Minimum Wage Law, the minimum wage is $8.25. If an employer wishes to take a tip credit, that employer must pay the tipped employee at least $4.95 per hour. The employer can then take a tip credit of no more than $3.30 towards its minimum wage obligations ($8.25-$4.95). Again, the same tip credit that is applied to the straight-time minimum wage must be applied to the overtime rate.
In order to correctly calculate the overtime rate for tipped employees, we begin with the overtime rate for non-exempt employees generally. Under the IMWL, overtime must be paid at a rate of at least $12.38 ($8.25 x 1.5). Next, we have to subtract the employer's tip credit which, under the IMWL, cannot exceed $3.30. The tipped employee's overtime rate, therefore, must be at least $9.08.
In addition to receiving sufficient tips to meet the minimum wage, the waiter in our example must receive the following direct wages:
$4.95 x 40 hours = $198.00
$9.08 x 5 hours = $45.40
The mistake many employers make is calculating the overtime rate based on the sub-minimum direct wage rate (in this example, $4.95 x 1.5=$7.43):
$4.95 x 40 hours = $198.00
$7.43 x 5 hours = $37.13
Miscalculating the overtime rate in this example would lead to a shortfall of $8.27 and constitute a violation of IMWL overtime law.
With these basic principles in mind, we can also calculate the minimum overtime rates for tipped employees in Chicago and in neighboring states where the FLSA governs. The formula for calculating the overtime rate of a tip credit employee is deceptively simple:
(Overtime Rate) - (Tip Credit) = Tip Credit OT Rate
Under the current iteration of the Chicago Minimum Wage Ordinance, the minimum wage rate is 10.00 and a tipped employee must be paid at least $5.45 per hour by the employer. In order to figure out the overtime rate for tipped employees, we have to use the same formula as above:
($15.00) - ($4.55) = $10.45 is the Chicago Ordinance tip credit OT rate
Under the Fair Labor Standards Act, the minimum wage is $7.25 and a tipped employee must be paid at least $2.13 per hour.
($10.88) - ($5.12) = $5.76 is the FLSA tip credit OT rate
Keep in mind that all of the examples we have covered today used the minimum wage of each statute. The same formula holds true, but the numbers will be different, when the employer pays above the applicable minimum wage.
Are you a tipped employee who has questions about your pay? Do you believe you may not have been paid all of your overtime? Call our Chicago wage and hour attorneys today to arrange a free and confidential consultation. You may be able to recover unpaid minimum wages and overtime, additional damages, interest, and attorneys' fees and costs.
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