Federal and Ohio Laws for Tipped Employees

Employers such as restaurants, bars, strip clubs, and those who employ delivery drivers, among others, tend to pay employees at a rate that is less than the full minimum minimum wage. The difference is made up by customers who pay tips. This is called a “tip credit.” However, in order for an employer to enjoy the benefit of claiming a tip credit towards meeting the requirements of paying an employee minimum wage, there are a few rules that an employer must follow. If not, a “tipped employee” must be paid the full minimum wage for every hour he or she works. The employee may also recover double damages under federal law and triple damages under the Ohio Constitution (yes, that means triple damages for every hour). Before explaining in more detail, here are the 5 rules for “tipped employees:”

Rule #1: Tip credit employees must be paid at least minimum wage. This seems obvious, but employers fail to meet this minimum requirement due to a variety of reasons, such as an employee having a slow shift or an employer passes on business expenses onto the employee, among other reasons.

Rule #2: Under the Fair Labor Standards Act (FLSA) and Ohio law, a tipped employee is a worker who customarily and regularly receives tips that exceed $30 a month. It cannot be sporadic. For example, during months where you do not receive $30 or more in tips, you are entitled to the full minimum wage.

Rule #3: Managers, supervisors, and owners cannot retain tips. Tips are the property of the tipped employee and can only be retained by the employee except for a valid tip pooling arrangement limited to employees who customarily and regularly receive tips (rule #2). This rule applies even if an employee is paid at least the full minimum wage for every hour.

Rule #4: Next, they must first be informed of their rights as a tipped employee prior to being paid less than the full minimum wage. If not, the employee must be paid the full minimum wage. For example, any of tip credit provisions such as (1) the amount of cash wage the employer paid tipped employees; (2) the additional amount claimed by an employer as a tip credit, which cannot exceed $5.12; (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 tipped employees unless the employee has been informed of the tip credit provisions.

If a “tipped” employee is not first informed of these rights, an employer cannot pay them less than the full minimum wage.

Rule #5: While Ohio law mirrors the FLSA, there is a slight wrinkle in that Ohio’s minimum wage has increased each year (while federal minimum wage has not). Under Ohio law, employers may claim a tip credit of up to half of the full minimum wage during the applicable year. The applicable minimum wage rates have increased the last several years, so if an employer keeps an employee’s rate at the same rate despite Ohio’s minimum wage increasing the next year, it would violate the Ohio Constitution. For example, let’s assume an employee is paid $4.28 per hour (which is 1/2 of the minimum wage rate in Ohio for 2019). In 2020, it increased to $8.70, which means the tip credit rate for that year was $4.35 per hour (1/2 of the minimum wage rate). If an employee is still paid $4.28 per hour, it would violate the Ohio Constitution and the employee is entitled to be paid the full minimum wage for every hour (plus triple damages).

What is a tipped employee?

While tipped workers can be paid less than the minimum wage, there are many ways in which they are paid less in violation of the law, including misclassifying employees as a tipped worker, miscalculating overtime pay on the wrong basis, or operating a tip pool improperly.

Many times, individuals assume they are being paid properly because they receive tips and trust that their employer is complying with the law. However, the rules governing tipped employees are complex and require the attention of a wage and hour attorney who regularly practices in this area of the law.

In Ohio, a tipped employee is an employee who:

1. regularly and customarily receives $30 or more per month in tips; and
2. must be paid at a legal base rate of ½ of Ohio’s minimum wage for the applicable year.

For example, if Ohio’s minimum wage in 2021 is $8.80, you must be paid at least $4.40 per hour and regularly and customarily receive $30 or more per month in tips. In Ohio, employers with annual gross receipts of at least $305,000 are subject to Ohio law. 

Employees must be paid the minimum wage when tips are combined with the tipped hourly wage. The federal minimum wage is currently $7.25 per hour; Ohio’s is $8.80 per hour (for 2021, but Ohio’s minimum wage is expected to increase in 2022 onward). If you are not receiving at least the applicable minimum wage (i.e., the employer had a slow week and the like), the employer must make up the difference in wages so that you are paid the minimum wage.

Tip credit

As explained above, tip credits allow employers to pay employees less than the minimum wage, as long as employees’ combined tip and cash wage earnings are equivalent to the minimum wage or exceed minimum wage.

Tip credits are calculated by subtracting the cash wage from the minimum wage (minimum wage – cash wage = tip credit). The FLSA allows a tip credit of $2.13 per hour against the federal minimum wage of $7.25 per hour. In Ohio, employers must pay a tipped employee at least half of the applicable minimum wage for that year. For example, the minimum wage in Ohio for 2021 is $8.80, and the cash wage is $4.40. By subtracting $4.40 from $8.80, the tip credit will be $4.40 ($8.80 – $4.40 = $4.40).

• must regularly make $30 in tips each month
• be paid an hourly cash wage
• retain all tips
• be given advance notice of tip credit either orally or in writing

In Ohio, the tip credits claimed by the employer cannot exceed $4.40 or the amount of tips a tipped employee receives. If the employee’s tips and cash wage do not equal the minimum wage, the employer is required to make up the difference.

Employers are required to inform tipped employees of tip credit policies. Relying on the information that employees may be able to infer from pay stubs does not count as informing employees.

Failure to inform employees about tip credit policies means employers cannot legally claim tip credits.

Job duties that do not generate tips

In addition, there are many examples where a “tipped employee” performs non-tip-generating job duties (i.e. security personnel, rolling silverware, folding napkins, bussing tables, cleaning up, setting up, closing down, among other scenarios). If a tipped employee spends 20% or more of the workweek performing the non-tipped job duties, you must be paid the full minimum wage for such hours associated with those duties.

Overtime for tipped employees

Are tipped employees entitled to overtime?

Yes. However, this is where violations are likely to occur. As to federal law, employers must multiply the federal minimum ($7.25 per hour) wage by 1.5, then subtract the amount of tip credit used to arrive at the correct overtime rate of pay. If this formula is not followed (as to federal law), you could be entitled to seek unpaid overtime compensation (and double damages). 

Tip pooling

The FLSA and Ohio law allows employees to participate in a practice called tip pooling. It may also be referred to as tipping out or a tip pool. In general, tips belong to the employee. The employer cannot make employees give them their tips unless a valid tip pooling arrangement exists.

When an employer requires tip pooling, this means all employees in the pool must chip in a portion of their chips, which are then divided among a group of employees to be split out of a percentage. Tip pools are legal so long as they are done according to company policy AND only those who customarily and regularly receive tips. For example, if tips are shared with managerial employees, security personnel, or other non-tipped employees, this could result in a minimum wage violation. In such instances, an employee is owed the full minimum wage, reimbursement of tips that were not properly utilized by the employer, and other damages.

Scenarios when employers could violate the law for tipped employees

Given these laws are complex, some common wage violations of tipped employees’ rights include:

• tip pools are shared with non-tipped employees (or non-tipped employees take tips such as managers, supervisors, and owners)
• not paying overtime correctly or not paying overtime for hours worked over 40 in a workweek
• not paying the correct tip credit rate
• employees are paid 100% in tips (rather than a cash wage by the employer).

How paying credit card tips to employees affects tipped employees

Tipping with a credit card has become more commonplace, and there are some confusing aspects to how this affects tipping.

In some cases, employers must pay a percentage to the credit card company on each sale. Some states allow employers to subtract a proportionate amount of the tip to cover some of the employee’s share of the fee. If a credit card company charges a 4% fee, an employer could legally reduce an employee’s tip by 4%.

Currently, Ohio law does not address credit card charge issues, making this issue confusing and complex to navigate.

Federal law currently states that the credit card charge, when subtracted from an employee’s tip, cannot result in less than minimum wage. 

Contact Bryant Legal, LLC if you have questions about your rights as a tipped employee for more information

If you are a tipped employee in Ohio and you suspect your rights as a tipped employee may have been violated, contact Bryant Legal, LLC today to speak with our experienced employment law attorneys.