Mr. Gonzalez

Hospitality Law

Tip the Scales in Your Favor by Providing Tipped Employees with Adequate Written Notice

By Luis J. Gonzalez, Attorney Litigation Practice & Alcohol Beverage Team, Holland & Knight

Complying with the Fair Labor Standards Act (FLSA) and the Department of Labor's (DOL) regulations for tipped employees continues to present challenges for hoteliers and others in the hospitality industry. While recent attention has been paid to proper tip pooling practices (employers requiring certain tipped employees to chip in a portion of their tips, which are then divided among a group of employees), equal attention must be given to the FLSA's mandatory notice provision to tipped employees. A continuing trend in wage and hour lawsuits stems from the employer's failure to give the tipped employee the required notice. When such a failure occurs, the employer may be liable for back pay, liquidated damages, and the employee's attorneys' fees and costs.

Who Are Tipped Employees Under the FLSA?

Under the FLSA, a "tipped employee" is one who is engaged in an occupation in which he or she customarily and regularly receives more than $30 per month in tips. Tipped employees typically include waiters, waitresses, bellhops, counter personnel (who serve customers), bussers, and bartenders. Tipped employees must be paid the required minimum wage - in addition to any tips earned - even if the employee's weekly tips alone, when divided by the number of hours worked, exceed the required minimum wage. The minimum wage varies by state and cannot be less than the federal minimum wage. It is important to note that under the current DOL regulation, an employer is prohibited from using an employee's earned tips for any reason - with a few exceptions. Therefore, where a tipped employee receives the federal minimum wage of $7.25 per hour from the employer plus tips, the employer cannot require the employee to turn over the tips to the employer. (The application of this restriction has been called into question by various courts interpreting the FLSA.)

Exceptions to FLSA Requirement That Tipped Employees Keep All Tips

There are several exceptions to the requirement that tipped employees keep all tips earned. The first exception is when the employer has a valid tip pooling or sharing arrangement among employees who customarily and regularly receive tips. As mentioned above, a tip pool is a mechanism by which tipped employees who are subject to the pool contribute a portion of their tips, which are then divided among a group of employees. Typically, tip pools are established to allocate collected tips between servers, bussers, food runners, and bartenders, but tip pools can also be found in other occupations, such as valet parking attendants. The FLSA does not impose a maximum contribution amount or percentage on valid mandatory tip pools, but employers may not retain any portion of the tip pool for any other purpose.

A second exception to the requirement that tipped employees keep all tips earned is where tips are charged on a customer's credit card. In such cases, the employer, who must pay the credit card company a percentage on each sale, may pay the employee the tip earned, less the percentage charged by the credit card company. For example, where a credit card provider charges an employer 2 percent on all sales charged, the employer may pay the tipped employee 98 percent of the tips without violating the FLSA. However, this charge on the tip may not reduce the employee's wage below the required minimum wage. The amount due the employee must be paid no later than the regular payday and may not be held while the employer is awaiting reimbursement from the credit card company.

The third exception to the requirement that tipped employees keep all tips earned is the focus of this article. It allows an employer to utilize a tipped employee's earned tips as a credit against a portion of the minimum wage obligations to the employee. For example, an employer who is required to pay employees a federal minimum wage of $7.25 per hour may, under the FLSA, take a credit of $5.12 per hour from the employer's minimum wage obligations for employees who customarily and regularly receive more than $30 per month in tips. What results is that an employer is only required to pay tipped employees a minimum wage of $2.13 per hour. The difference between the federal minimum wage ($7.25) and the federal tipped employee minimum wage ($2.13) is referred to as the "tip credit" ($7.25 - $2.13 = $5.12 tip credit).

The amounts used in this example would vary by state if the state has its own, higher minimum wage. In Florida, for example, the minimum wage is currently $8.05 per hour and the tipped employee minimum wage is $5.03 per hour. A Florida employer's tip credit for an employee who customarily and regularly receives more than $30 per month in tips is therefore $3.02 per hour ($8.05 - $5.03 = $3.02 tip credit). Of course, if the employer decides to pay a tipped employee the full minimum wage rather than the sub-minimum wage, a tip credit would not apply. Note that an employer utilizing the tip credit does not physically retain any portion of the employee's tip nor does the employee actually turn over any money to the employer. Instead, as the prior example shows, the tip credit is effectuated by the employer paying the tipped employee a lower minimum wage.

Tip Credit Notice Requirements

Before an employer can take advantage of the tip credit for tipped employees and pay the lower minimum wage, the FLSA and DOL regulations require employers to give the tipped employee notice:

  1. of the amount of cash wage the employer is paying the tipped employee (which must be at least $2.13 per hour);

  2. of the additional amount claimed by the employer as a tip credit (which cannot exceed $5.12; see calculation example above);

  3. that the tip credit claimed by the employer cannot exceed the amount of tips actually received by the tipped employee;

  4. that all tips received by the tipped employee are to be retained by the employee except for a valid tip pooling arrangement limited to employees who customarily and regularly receive tips; and

  5. that the tip credit will not apply to any tipped employee unless the employee has been informed of these tip credit provisions.

There is no clearly defined rule or standard for providing the notice and the employer is only required to inform the employee - detailed explanations and employee understanding is not required. Indeed, the issue of what constitutes adequate notice has been the subject of many court opinions. But courts are in agreement that employers do not have to explain the tip credit notice but rather must simply inform employees. Employers may give oral or written notice; if in the notice is in writing it can be accomplished through various media. Some courts have held that a poster containing the required information and displayed in a prominent area where employees frequent could be sufficient notice. Other courts have held that oral notice and written notice (such as information contained on the employee's paystub), combined, adequately provided the tip credit notice to the employee. Nonetheless, employers should not leave such a determination to the courts because complying with the notice provision is simple. Moreover, because employees come and go, locating a former hiring manager to testify that he or she previously verbally provided an employee the required tip credit notice is risky.

Consequences of Failing to Comply with Tip Credit Notice

Employers who utilize the tip credit to pay a tipped employee a subminimum wage and who fail to comply with the FLSA's tip credit notice provision face stiff statutory penalties. First, the employer will be liable to the employee for the tip credit. This means that in states that follow the federal minimum wage, the employer must pay the tipped employee back the $5.12 tip credit for each hour the employee worked. If the tipped employee worked 40 hours per week for two years, the amount of back pay owed would be approximately $21,299.20.

Second, the FLSA further provides the tipped employee additional damages in an amount equal to the back pay as a form of liquidated damages (a predetermined penalty for noncompliance with the FLSA). Therefore, in the example above, a successful litigant could recover both $21,299.20 in back pay and $21,299.20 in liquidated damages.

Third, a successful litigant may further recover his or her attorney's fees and costs, which given the cost of litigation, could undoubtedly exceed both the back pay and liquidated damages amounts in the example above. Finally, let us not forget the amount the employer will spend on its own attorneys in defending the claim.

Best Practices for Giving Tip Credit Notice

To avoid a dispute on whether a tipped employee received the tip credit notice, employers should consider implementing a tip credit notice form as part of their new hire procedures. Further, if an employer has any doubts as to whether a current tipped employee received the tip credit notice or if the tip credit notice was given verbally, the employer should provide the current tipped employee with the notice again, in writing. The notice should include the following information:

  • The amount of cash wage to be paid to you per hour will be $_____.
  • The amount of your tips per hour to be credited as wages will be $_____ per hour if you have received a sufficient amount of tips to cover the tip credit.
  • You have the right to retain all the tips you receive, except for a valid tip pooling arrangement limited to employees who customarily and regularly receive tips.
  • Your required tip-pool contribution or percentage is _____.
  • The tip credit being taken is only on the amount you actually receive in tips and may not exceed the value of the tips you receive.
  • The tip credit shall not apply unless you have been informed of these requirements.

Providing tipped employees the tip credit notice is easy to do but also easy to overlook. Best practices dictate that the tip credit notice should be in writing, acknowledged by the employee, and made part of the employee's employment file.

Luis J. Gonzalez is an attorney in the Litigation Practice and Alcohol Beverage Team in Holland & Knight's Orlando office. From providing representation in employment matters and contract disputes to advising how to obtain a distributor or restaurant liquor license and AB&T regulatory compliance, Mr. Gonzalez offers clients an in-depth understanding of a broad subject matter. Mr. Gonzalez helps clients enforce restrictive covenants, protect trade secrets, conduct internal investigations, and resolve contract disputes and business torts. In addition, he represents employers in litigation involving a broad range of employment-related matters, such as counseling on the handling of performance evaluations and employee terminations. Mr. Gonzalez can be contacted at 407-244-1163 or Please visit for more information. Extended Bio... retains the copyright to the articles published in the Hotel Business Review. Articles cannot be republished without prior written consent by

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