In the United States, it is illegal to use tip credit for occupations that are traditionally tipped. A tip credit refers to paying an employee less than minimum wage and counting tips as part of their wages. This can be problematic because if the employees earn more in tips than they would have earned at minimum wage, then they will not receive any additional compensation from you.
The first issue with using a lower-than-minimum-wage salary due to tipping income is that employers may easily take advantage of their workers. They may do it by forcing them to work longer hours or by requiring them to perform duties that are not within their job description. This is because the employees know they cannot refuse the assignment due to fear of being fired or losing status as a reliable employee.
The second issue with using tip credits in your company relates directly to what kind of occupations you have tipped workers performing. Employees who are typically tipped by customers include waiters, bartenders, valets, barbers/hairstylists, and manicurists/pedicurists amongst others. As long as these individuals receive tips equal to or greater than minimum wage for each hour worked, then there will be no issues complying with federal laws regarding payment based on gratuities received from patrons. However, if an individual does not meet this requirement but still is employed in one of these occupations, then they are subject to the minimum wage laws stated in the Fair Labor Standards Act.
The third issue with using tip credit is that if your employees do not receive an adequate amount of tips during their workday, you will be required to pay them additional compensation so that they earn at least $11/hour (US). This rule applies only when workers have earned less than $30 in tips per month on average over three months or more depending on employer size. Small employers must keep track and report this information for each worker every month while large employers need only keep records once a year for tax purposes. If violations occur, there can be harsh penalties including fines up to $100000 as well as imprisonment.
Unlawful use of a tip credit is an issue that all business owners need to understand to avoid fines and penalties with the law. If you are unsure about how this policy will affect your company or what it means for tipped workers, then contact a possible employment law attorney.
Tips to help you avoid the unlawful use of a tip credit
As a business owner, it is important to understand how the Fair Labor Standards Act (FLSA) affects your company and employees. If you are unsure about any of the laws then consult with an employment law attorney or research more online.
The first thing that falls into this category has already been discussed briefly in the previous section. Do not allow tipping employees to work extra hours without additional compensation. Extra working should only be possible when they voluntarily agree because performing these duties outside their job description may be considered involuntary servitude, which is illegal.
Another tip includes requiring tipped workers who are earning sub-minimum wages due to low tips to perform duties that are not within their job description. You should avoid this practice as well because it is against the law and you may be required to compensate those employees for a full 40 hours of work. The compensation may have to happen even if they have earned less than $30 in gratuity over three months.
Finally, do not take advantage of your tipped workers by forcing them to accept additional assignments or other forms of poor treatment from supervisors. The acceptance may simply be due to fear of being fired or losing status as reliable staff members at your company. As long as any worker meets minimum wage requirements under federal law, then they cannot legally refuse an assignment unless it would interfere with another obligation. Some of these other obligations may include; caring for a child during school hours, which qualifies as legal parental leave according to FLSA.
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