The Minimum Wage Increase: Just the tip of the iceberg
By Lacey Nadeau
The problem: As a carwash owner in Florida, you pay several of your most inexperienced workers the federal minimum wage. Well, you pay about half the amount, but it’s OK because you know that your employees receive tips. You don’t count the tips, and you don’t keep any for yourself, but you see them pocket money while they’re working the line. You take advantage of the “tip credit” set out in the 1996 version of the Fair Labor Standards Act (FLSA), which hasn’t changed, and you pay some of your employees $2.13 an hour. Months go by, and you get hit with a lawsuit. One of your former staff members claims he was underpaid, and now you’re knee-deep in legal fees and paperwork, searching for a way to prove he earned plenty of tips – to prove you paid enough.
When the U.S. Congress raised the minimum wage to $5.15 in 1996, it made a provision for employers whose workers earn tips. The magic wage of this “tip credit” was set at $2.13 an hour, an amount that can be paid only in certain circumstances. Though the FLSA was amended this year in order to bring the federal minimum wage up to $7.25 by the summer of 2009, this lower tip wage will not get any higher. While that sounds like good news to some of you, it can be dangerous.
Jeff Hirsch, a law professor at the University of Tennessee in Knoxville who co-authored a book titled “Understanding Employment Law,” says that while the new minimum wage law doesn’t directly affect the tip provision of 1996, it does change it indirectly.
An employer of a tipped employee can take advantage of the tip provision offered under the FLSA in certain circumstances. The provision says that an employer can pay as low as $2.13 an hour as long as:
- an employee “customarily and regularly” receives at least $30 in tips per month,
- the employee keeps all of the tips earned, and
- the hourly wage, combined with tips, adds up to an amount that is equivalent to the minimum wage.
It’s this last one that is the kicker. Though the magic wage of $2.13 hasn’t changed, the federal minimum wage has. You, as employer, either have to pay more, or be sure that your employee is earning more tips (or was already earning $3.72 an hour in tips, or more).
Hirsch also points to the fact that this calculation of whether an employee received the minimum wage must be made on a weekly basis. Even if an employee’s wage and tips exceed the minimum wage in one week, for example, it does not affect the question of whether he or she received the minimum wage the following week.
Carolyn Richmond is a partner in the New York City office of the national law firm Fox Rothschild. She represents and counsels clients in a variety of labor and employment matters, including wage and hour issues. She says that employers need to be cautious – sometimes the federal law is just a floor. “If state law provides greater benefits to an employee – state law prevails,” she says. “Other states have a smaller tip credit. It is really imperative for business owners to not only keep track of the changing minimum wage rates, but also whether a tip credit is permitted in their jurisdiction.”
Unfortunately, wage and hour lawsuits – and even class action wage suits – are becoming more common. “Many small- business owners are being targeted in record proportions, often the victims of drive-by class-action lawsuits,” Richmond says.
The problem is two-fold. First, the federal Department of Labor (DOL) and state DOL agencies are launching investigations that can result in significant fines and penalties. Second, plaintiffs’ lawyers are filing class and collective actions against employers in record numbers, Richmond says, alleging minimum wage and overtime violations. Additionally, because class-action lawsuits can devastate a small business, she says, “business owners need to get out in front of the issue before the DOL investigates, or they are served with a class action law suit. As they say, the best defense is a good offense.”
The most obvious defense would be to pay your workers a wage that is at or above the minimum requirement. (By the way, California and Nevada don’t even allow employers to use that federal tip provision.) Another defense would be to require all of your employees to accurately and consistently report their tips. This is a way for you to protect yourself against future wage disputes, as well as a way to look out for your employees – to make sure they are all earning what they deserve.
It’s also a way for you to avoid IRS penalties, once tax time rolls around. If an employee makes more than $20 a month in tips, the amount must be reported to the employer so that appropriate taxes can be withheld. Both the employee and the employer can be penalized for a failure to comply. Some IRS forms are available to business owners to help get their workplace on the right track to compliance. These forms allow employees to keep a daily log of all tip income and report it to their employers.
“Small-business owners should absolutely put in place a comprehensive tip-reporting and tracking program for their employees,” Richmond urges. “[They] should make sure there is a written policy in place explaining the employer’s requirement that all tips be reported to the employer. The policy should be translated in multiple languages, depending on the workplace demographics as necessary.”
So when it comes to lawsuits, who is responsible for keeping track of the tips? “The FLSA is silent on it,” Hirsch says, though he points to a Department of Labor regulation that sheds some light on things. It states that employers can count tips as part of the employee’s wage on the basis of the employer’s information concerning the tipping practices and receipts in his establishment. But if an employee wants to prove he or she received fewer tips than the employer determined, the burden of proof is on the employee, according to the regulation.
Hirsch says he is unaware of any provision that prohibits employers from requiring employees to record their tips. “To the extent that an employer trusts that information,” he advises, “it would probably establish a pretty solid tip amount for the employer to use in calculating whether the employee is making the minimum wage.”
The FLSA does speak about instances where employers collect all tips and then distribute them, Hirsh explains, which would allow employers to have a more accurate sense of how much is being paid in tips. “I don’t know whether that’s realistic in [the car-care business], however,” he says. “With regard to avoiding lawsuits, trying to keep on top of how much employees are receiving in tips is the best practice.”
A few more things you should do to protect yourself are to conduct a regular payroll audit to confirm compliance with all federal and state wage and hour laws; to make sure that if hourly employees are working more than 40 hours a week, they are being paid at the proper rate; and to confirm that employees are accurately tracking their hours of work.
The good news is that many employers in the car-care industry pay the minimum wage – or higher. For many of you, it’s the only way to guarantee good labor.