Minimum Wage and Overtime Pay for Tipped Employees

Most employees must be paid at least the minimum wage, and overtime is paid at the rate of one-and-a-half times their regular rate of pay. But for tipped employees, such as restaurant servers, the regulations are not that simplistic. In many cases, employers of tipped employees may take tip credits against the minimum wage, so employees are actually paid less than the minimum wage. And since tipped employees may be paid less than minimum wage, the definition of regular rate of pay may not be clear.

What Are Tip Credits?

Under the Fair Labor Standards Act (FLSA), even tipped employees must receive at least the minimum wage. However, since part of their income is received in the form of tips, those tips may be counted by employers toward the minimum wage paid to an employee. The employer can take a “tip credit” against the minimum wage, and only pay a minimum cash wage. However, if the employee does not receive enough in tips so that his total wage is the minimum wage, then the employer must make up the difference.

The current federal minimum wage is $7.25 per hour. Employers may take a tip credit of $5.12, so the employee must be paid a minimum cash wage of $2.13 an hour. Consider an example. The employee works 35 hours in one week and reports $152.00 in tips.

Cash wages without tip credit = $2.13/hr x 35 hr = $74.55
Tip credit = $5.12/hr x 35 hr = $179.20
Tips received by employee = $152.00
Tip credit make-up = $179.20 - $152.00 = $27.20
Actual wages paid by employer = $74.55 + $27.20 = $101.75

Of course, when the cash wages paid by the employer are added to the tips received, the total gross wages subject to income tax withholding is $253.75, which would be equivalent to the employee being paid for 35 hours at minimum wage. If the employee had received more than $179.20 in tips, then there would be no tip credit make-up, and the employee would be earning more than minimum wage.

One important point to remember is that the minimum wage, the tip credit, and the minimum cash wage varies from state to state. In fact, some states don’t even allow a tip credit. The U.S. Department of Labor has a website listing the rates for each state.

How Is Overtime Calculated for Tipped Employees?

Normally, overtime is paid at the rate of one-and-a-half times an employee’s regular rate of pay. According to the Code of Federal Regulations (CFR). “The regular hourly rate of pay of an employee is determined by dividing his total remuneration for employment (except statutory exclusions) in any workweek by the total number of hours actually worked by him in that workweek for which such compensation was paid.” [29 CFR 778.109] (See the article The Basics of Calculating Overtime Pay for a detailed discussion of how this definition is applied to the calculation of overtime pay.)

On the other hand, the payment of wages to tipped employees is covered by a different section of the CFR. Sections 531.50 through 531.60 provide details on how tipped employees are paid.

When a tipped employee works overtime, he must also be paid at a rate of one-and-a-half times his regular rate of pay, but the regular rate of pay is calculated differently because of the tip credit. If a tipped employee is paid less than minimum wage, the minimum wage must used as the basis of the regular rate of pay.

Suppose the employee in the above example works 45 hours in one week and receives $195.00 in tips. The overtime premium is 50% of the regular rate of pay, or 50% of the minimum wage.

Cash wages without tip credit = $2.13/hr x 45 hr = $95.85
Tip credit = $5.12/hr x 45 hr = $230.40
Tips received by employee = $195.00
Tip credit make-up = $230.40 - $195.00 = $35.40
Overtime premium = (50% of $7.25) = $3.63/hr
Overtime pay = $3.63/hr x 5 hr = $18.15
Actual wages paid by employer = $95.85 + $35.40 + $18.15 = $149.40
Total wages subject to tax withholding = $149.40 + $195.00 = $344.40

Additional compensation can change the employee’s regular rate of pay. Suppose the restaurant paid its servers a bonus of $1 for each dessert sold from a special menu, and the above server sold 18 special desserts during the week. Since the regular rate of pay is calculated by dividing the total hours worked into the total compensation, the calculation would differ in this way.

Total pay at minimum wage = $7.25/hr x 45 hr = $326.25
Total compensation = $326.25 + 18.00 (for the desserts) = $344.25
Regular rate of pay = $344.25 / 45 hr = $7.65/hr
Overtime premium = (50% of $7.65/hr = $3.83/hr)
Overtime pay = $3.83/hr x 5 hr = $19.15
Actual wages paid by employer = $95.85 + 35.40 + $18.00 + $19.15 = $168.40
Total wages subject to tax withholding = $168.40 + $195.00 = $363.40

Overtime Calculations for Tipped Employees

Although tipped employees are often paid less than minimum wage, they are still entitled to overtime pay as if they were earning minimum wage. However, in the above examples the employee received less than the tip credit in tips, so the employer had to make up the difference. On the other hand, if the employee receives more than the tip credit in tips and works overtime, the employer does not have to include the tips in the calculation of overtime pay. The regular rate of pay is still the minimum wage. And if the employee’s hourly rate is more than the minimum wage, then he would be paid overtime like any regular employee.