FAQs About Tipped Employees and the (Vexingly Complicated) Tip Credit

One of the most complicated aspects of federal and state minimum wage laws for tipped employees in Oklahoma is the “tip credit.”

A “tipped employee” under the wage and hour laws is any worker who receives tips as part of one’s regular income — restaurant waiters and waitresses, bartenders and bar servers, etc. Many tipped employees do not understand the laws designed to ensure they receive the federally mandated minimum wage and are allowed to keep the tips they earn.

Tipped Employees

One big factor that makes the rules hard to understand is the tip credit, which employers can use to reduce the wages they would otherwise have to pay. The tip credit is allowed under the law, but some unscrupulous employers use the tip credit to take advantage of uninformed workers.

In my previous blog post, I answered “Some FAQs About Tipped Employees and the Minimum Wage,” including:

1. Who is considered a tipped employee under the law?
2. What is the minimum wage for a tipped employee?
3. Are any employers/employees exempt from the minimum wage law?

Now, let’s zoom in on the tip credit. After I have explained the basics, in my next post, I will discuss: “Ways Some Employers Are Ripping Off Their Tipped Employees.”

How the Tip Credit Works

The tip credit is based on the idea that tips are a big part of a tipped employee’s wages, but the employer is still obligated to ensure employees earn the minimum wage, which is $7.25/hour under federal and state law.

To make that happen, employers must pay tipped employees a base pay. Oklahoma’s base pay is $3.625/hour (half the minimum wage). In satisfying the minimum wage requirement, employers can take a tip credit on some or all of the remaining $3.625/hour, depending on how much in tips an employee earns.

The requirement is met if the employee earns enough tips to cover the rest of the minimum wage. If the tips are insufficient, the employer can take the tip credit up to the amount of actual tips but must pay the remainder to ensure employees earn the minimum.

1. Is the tip credit calculated by the hour, the day, or the week? An employer totals an employee’s tips for the entire work week and then averages the tip income per hour to calculate the tip credit.

2. How does the employer know how many tips an employee has received? A worker who earns at least $20 in tips during a calendar month must report the tips to the employer by the tenth day of the next month. Employers need tip reports to calculate tip credits, and employers must also include tips in calculating withholding.

An employer must establish a system that results in employees reporting their tips. Many employers use electronic reporting systems. The IRS provides optional forms for a tipped employee to keep track of tips and to report tips to employers.

3. Are there limits on the workers and the kinds of work for which an employer can apply for the tip credit? An employer can take a tip credit only on the wages of truly “tipped employees” as defined by law. If a worker does not usually receive tips but gets some nice tips during the holidays, the employer must still pay the minimum wage; the tips cannot be counted to reduce the wage the employer pays.

Also, if an employer assigns a worker to spend more than 20% of one’s work time doing work that does not generate tips, a tip credit cannot be applied to the untipped work. The employer must pay the full minimum wage for that work.

4. Is an employer required to explain the tip credit to employees?

An employer who intends to take the tip credit must notify tipped employees, informing them of the following:

a. How much the employer is paying in base pay. In Oklahoma, the base pay must be at least $3.625/hour, but it can be more. However, an employer cannot fluctuate the base pay weekly based on the amount of tips collected.

b. How much of a tip credit will the employer claim? That is a simple calculation: the minimum wage of $7.25 minus the base pay set by the employer. For example, if the employer pays the minimum base pay of $3.625/hour in Oklahoma, another $3.625 can be claimed in tip credit. A higher base pay means a lower tip credit.

c. The employer must inform employees that the tip credit can never exceed the amount of the actual tips. If the tips are insufficient to achieve the minimum wage, the employer can take the tip credit but must pay the remainder to satisfy the minimum.

d. The employer must also inform tipped employees that tips belong to the workers who earned them.

If an employer fails to provide written or oral notification of these points, the employer cannot use the tip credit and must pay the $7.25/hour minimum wage.