White House takes on tip credit

Under the Fair Labor Standards Act (FLSA), tipped employees are subject to the same minimum wage rate as other workers: $7.25 per hour. However, a tipped employee’s wages from the employer may be far less. Current rules permit an employer to take a tip credit against the minimum wage. Under the tip credit rules, an employer of a tipped employee is only required to pay $2.13 per hour in direct wages if that amount combined with the tips received at least equal the federal minimum wage. If the employee’s tips combined with the employer’s direct wages of at least $2.13 per hour do not equal the federal minimum hourly wage, the employer must make up the difference in direct wages. A state by state tip credit chart is reproduced in this Report Letter on page 11.

Proposal

In tandem with his proposal to increase the federal minimum wage to $10.10, President Obama supports a plan to increase the tipped minimum wage to $4.90 by 2016, followed by annual increases to bring the tipped minimum to 70% of the full minimum wage.

Statistics

According to a new report from the White House, the current tipped minimum wage is outdated and difficult to administer. The report points out that the tipped minimum wage has remained stuck at $2.13 per hour since 1991 despite increases in the regular minimum wage in 1996 and 2007. As a result, today’s tipped minimum wage is just 29% of the full minimum wage, meaning that employees who are paid the tipped minimum must earn over 70% of their wages through tips. By contrast, historically the tipped minimum wage was defined as a percentage of the full minimum wage, never falling below 50% before 1996.

The report also contends that, while employers are required to make up any shortfall to ensure that an employee’s direct wage plus tips equal the regular minimum wage, in practice the provision is difficult to enforce. (White House Report: The Impact of raising the Minimum Wage on Women and the Importance of Ensuring a Robust Tipped Minimum Wage (March 2014).)

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