DOL Tip Pay Rules Create Worker Shortages for Employers

While employers are generally required to pay non-exempt employees minimum wage, federal law allows employers to pay employees who customarily receive a certain amount of tips a reduced minimum wage in expectation that the employee’s tips will make up the difference.[1] Under federal law, that reduced minimum wage, known as the “tip credit rate,” is at least $2.13 per hour.[2] However, the tip credit rate may be higher depending on a particular state’s law.

Should a tipped employee fail to make enough tips to meet the minimum wage rate, the employer must “make-up” the shortfall by paying the employee the difference between the effective hourly wage the employee made in consideration of tips, and the federal minimum wage rate.[3] However, should a tipped employee earn enough tips to take their pay beyond the minimum wage rate, they are entitled to keep all monies earned in excess of minimum wage.[4]

This has created a disparity between the wages tipped employees make and that which non-tipped employees, such as cooks, maintenance people, managers, etc., especially during periods of high-volume.[5] During periods of low volume, non-tipped and tipped employees still earn minimum wage due to the employer’s make-up pay requirement. However, tipped employers make much more than minimum wage during periods of high volume, while non-tipped employees experience no change in pay. As a result, many businesses are experiencing a shortage of non-tipped workers.[6]

In an effort to address the wage-gap between tipped and non-tipped employees, employers are experimenting with a number of different payment methods. One of these methods, revenue sharing, involves charging customers a fee on all sales that goes directly to non-tipped employees.[7] The other, more popular method entails paying minimum wage to employees in customarily tipped positions, and shifting the cost of doing so to the consumer.[8] This method essentially involves incorporating the cost of paying all employees into the prices charged to the consumer. Both methods have been met with mixed success.[9]

As both these methods ensure that all employees are paid minimum wage, neither violate federal or state laws regarding employee labor rights. What remains to be seen, however, is whether these methods of payment can be more efficient, profitable, or sensible than the current tipped vs. non-tipped method of employee pay. Until a bright-line rule emerges, employers must continue to experiment to find the market-dependent balance between pricing and wages.

~Author: Aaron Ruffin, 2017 Gate City Bar Summer Associate, The George Washington University Law School, 2nd year Law Student

[1] Fact Sheet – Wage and Hour Division (WHD) – U.S. Department of Labor, Fact Sheet – Wage and Hour Division (WHD) – U.S. Department of Labor (2016), (last visited Jun 20, 2017).

[2] Id.

[3] Id.

[4] Id.

[5] “Restaurants Cook Up A New Way To Pay Kitchen Staff More: A Cut Of Sales,” NPR, (last visited Jun 26, 2017)

[6] Id.

[7] “Danny Meyer To Banish Tipping And Raise Prices At His N.Y. Restaurants,” NPR, (last visited Jun 26, 2017).

[8] Id.

[9] See “Why Restaurants Are Ditching The Switch To No Tipping,” NPR, (last visited Jun 26, 2017).