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Employees who are paid in tips may be entitled to overtime, but the math involved in computing what they are owed is more complicated compared to non-tipped employees. Knowing the rules and understanding the calculations can help you determine whether you are eligible for overtime and exactly how much is due to you. If you’re a server, bartender, or someone else who is regularly paid tips, do you know what your rights to overtime are? Check with The Lore Law Firm. We help workers throughout the country receive the wages and overtime the law entitles them to.

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What Are the Basics About Overtime?

If you work over 40 hours in a week, those additional hours are considered overtime. Employees who are not exempt under the Fair Labor Standards Act (FLSA) must be paid time and a half for these overtime hours. That means you have to be paid 1.5 times your regular rate of pay as overtime compensation. If you are not paid overtime, your employer is essentially committing wage theft and can be held liable.

Some employees (including executives and professionals, as defined by the FLSA) are exempt from overtime rules. In other cases, however, an employee has the right to overtime but it is difficult to calculate just how much he or she should be paid. This is the case with tipped employees. A tipped employee, under federal law, is a worker who regularly receives more than $30 in tips per month.

How Tipped Employees Are Paid

It’s important to remember that overtime pay amounts to 1.5 times an employee’s regular rate of pay (for this reason, it is also known as time and a half). Therefore, knowing how tipped employees must be paid under federal wage laws is critical in calculating the amount of overtime the employee deserves. This analysis starts with understanding the employee’s regular rate of pay.

The employee’s regular rate of pay is the amount of direct cash wages (the hourly rate that a tipped employee is paid) plus the tip credit that is claimed by the employer. The tip credit is the amount of money that the employer can count from tips that were actually received by the employee and which can therefore be credited toward the employee’s wages. Since the direct cash wage is substantially less than the federal minimum wage, the tip credit is essential to meeting the employer’s minimum wage obligations.

Employers cannot claim a tip credit that is higher than the amount of tips that were actually received by the employee. It also cannot exceed the difference between the federal minimum wage ($7.25/hour) and the minimum direct cash wage of $2.13/hour, even if the employee earns more than that amount in tips. That means the maximum tip credit is $5.12/hour. Also, the tip credit claimed for overtime hours must be the same as the tip credit claimed for regular hours.

Although employers can pay tipped employees the direct cash wage of $2.13/hour, tips must make up the difference between this rate and the federal minimum wage of $7.25/hour. If they don’t, the employer must pay the difference. Note that many states have laws regarding tipped employees that provide greater benefits and protections for workers than federal law – you should also check for information on your state’s laws

When the Tip Credit Can and Cannot Be Taken

Under Department of Labor regulations, an employer cannot take the tip credit for the time that an employee performs “directly supporting” (non-tip-producing) work that exceeds either:

  • 20% of the employee’s hours in a workweek (excluding any hours in which the employer does not take the tip credit); or
  • A continuous period of 30 minutes

Any time worked outside of the allowable tipped work duties must be paid at the federal minimum wage rate, with no tip credit permitted to the employer.

Example of a Tipped Employee’s Overtime Pay

Understanding the above information is important to determining the tipped employee’s required overtime pay. But the math is not always so straightforward. Some employers take advantage of this and manipulate the numbers to their advantage, hoping their employees won’t figure out that they are being cheated. A simple example will therefore help explain how much overtime a tipped employee is due.

Consider the following hypothetical scenario. An employer pays its employee the minimum direct cash wage of $2.13/hour. The employee works 50 hours a week and earns an average of $10 per hour in tips. As mentioned above, the first step is to calculate the employee’s regular rate of pay. A simple way to do so is as follows:

  • $7.25/hour (federal minimum wage) x 50 hours = $362.50
  • Since 10 of the 50 hours were overtime, the employee must be paid time and a half for those hours. So an extra half must be added in for those overtime hours. $7.25/hour x 0.5 x 10 hours = $36.25
  • The total amount the employee must be paid for the week is $362.50 + $36.25 = $398.75

But the next question is: on top of the direct cash wage, what does the employer actually have to pay versus what the employee received in tips? Remember, in this scenario, the employee earned an average of $10/hour in tips. The employer can claim the maximum tip credit of $5.12 per hour because what the employee actually received in tips exceeds this. Here is how the tip credit works into the calculation:

  • $5.12/hour x 50 hours = $256.00 (the total tip credit the employer can claim, which applies to all 50 hours since it must be the same for regular and overtime hours)
  • $398.75 – $256.00 = $142.75 (this is the amount the employer will have to pay the employee to ensure the employee is compensated for overtime)

Questions About Overtime? We Have Answers

The above calculations should make one thing clear: tips can complicate overtime pay. Some employers deliberately underpay their tipped employees, while others simply make a mathematical error. Either way, if you’re a tipped employee who works over 40 hours a week, you could be leaving substantial sums of money on the table. Don’t deny yourself the overtime pay you’ve earned. Contact The Lore Law Firm by filling out our client intake form to receive a free case review.