Both the Fair Labor Standards Act (“FLSA”) and the Illinois Minimum Wage Law (“IMWL”) allow an employer to use tips as a credit toward its minimum wage obligations for tipped employees. Under both laws, an employer who properly takes a tip credit can pay its tipped employees direct wages below the minimum wage (at least $2.13 per hour under the FLSA; at least $4.95 per hour under the IMWL) provided the tipped employees make sufficient tips to make up the difference between the direct hourly wage paid by the employer and the federal and state minimum wage. By way of example, a restaurant in the state of Illinois (where the minimum wage is currently $8.25) may claim a tip credit by paying its tipped servers $4.95 per hour and taking a tip credit of $3.30 ($3.30 = $8.25 - $4.95).
Importantly, tips are the property of the employee and the employer is prohibited from using an employee’s tips for any reason other than as a credit against its minimum wage obligation to the employee (“tip credit”) or in furtherance of a valid tip pool. A valid tip pool or sharing arrangement should only include employees who customarily and regularly receive tips, such as waiters, waitresses, bellhops, counter personnel (who serve customers), bussers, and service bartenders. A valid tip pool may not include employees who do not customarily and regularly received tips, such as dishwashers, cooks, chefs, and janitors. Employers are also prohibited from keeping tips.
If you are a tipped employee and have questions about your pay, please contact the Nolan Law Office immediately to set up a free consultation. In many cases, tipped employees may be able to recover substantial minimum and overtime wages as well as liquidated or “double” damages, interest, and attorneys’ fees and costs.
Where an employee receives tips only and is paid no direct wages by the employer, the employer cannot claim a tip credit and the full minimum wage is owed. In addition, an employer who pays insufficient direct wages to the tipped employee is liable for the full minimum wage less credits for direct wages paid.
Employers who take a tip credit must be able to show that tipped employees receive at least the minimum wage when direct wages and the tip credit amount are combined. If an employee's tips combined with the employer's direct wages do not equal the minimum hourly wage, the employer must make up the difference.
A tip pool is invalid when it allows employees who do not customarily and regularly receive tips to participate. For example, back-of-house employees like chefs, cooks, and dishwashers do not normally receive tips and therefore should not be participants in a tip pool or tip sharing arrangement. Likewise, employers (and their supervisors and managers) are barred from retaining any employee tips.
An employer must notify tipped employees of its intention to take a tip credit and inform the tipped employee of the following:
An employer who fails to provide the required information cannot use the tip credit provisions and therefore must pay the tipped employee the minimum wage that would otherwise be owed — as well as allow the tipped employee to keep all tips received.
When an employee is employed by one employer in both a tipped and a non-tipped job, the tip credit is only available only for those hours spent by the employee in the tipped occupation. While employers are permitted to take the tip credit for some time that tipped employees perform related duties that do not generate tips (e.g. making coffee), no tip credit may be taken for time where the tipped employee spends a substantial amount of his or her time (i.e. more than 20 percent in a workweek) performing related, non-tipped duties.
A compulsory service charge, often applied to bills for large dining groups or private dining parties, is not a tip. Service charges are part of the employer's gross receipts and cannot be counted as tips received by the employee. While service charges may be used to satisfy the employer’s minimum wage and overtime obligations, an employee who receives service charges could be improperly classified as tip-credit tipped employee.
In situations where a tip is charged to a credit card and the employer must pay a processing fee to the credit card company (e.g. 2.5% of the sale), the employer may deduct the fee percentage from the employee’s tip money. However, the amount deducted should not grossly exceed the credit card fee percentage or reduce the tipped employee’s wage below the required minimum wage. The tipped employee is also entitled to be paid his or her tips by the regularly-scheduled pay day regardless of whether the credit card company has already processed the payment.
When the employer takes a tip credit, overtime for the tipped employee is calculated on the full minimum wage ($8.25 under the IMWL), not the lower direct wage payment (e.g. $4.95). Under the law, an employer cannot take a larger tip credit for an overtime hour than a straight time hour.
If you are an Illinois tipped or restaurant industry employee and think your rights to a minimum wage or overtime have been violated, contact our Chicago employment attorneys to set up a free consultation.
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