Tip Credit

Tip credit is a provision under the Fair Labor Standards Act (FLSA) that allows employers to pay tipped employees below the standard minimum wage, as long as the employees earn enough in tips to make up the difference.

Example #1

Sarah works as a server at a restaurant where the standard minimum wage is $10 per hour. However, due to tip credit, her employer pays her a base wage of $2.13 per hour, expecting that her tips will bring her up to the $10 minimum wage.

Example #2

John is a bartender at a nightclub where the minimum wage is $7.25 per hour. With tip credit, his employer compensates him $4.25 per hour, assuming his tips will cover the remaining amount to reach the minimum wage.

Misuse

Misuse of tip credit occurs when employers fail to ensure that their employees' combined tips and base wages reach at least the standard minimum wage. This can lead to employees being underpaid and economically vulnerable.

Benefits

Tip credit can benefit employees by allowing them to potentially earn more than the standard minimum wage through tips. It can also help some businesses, particularly in the hospitality industry, manage labor costs while providing opportunities for higher earnings for the staff.

Conclusion

It is crucial to monitor the use of tip credit to ensure that employees are fairly compensated and that employers abide by wage laws. Protecting against misuse of tip credit safeguards employees from being exploited and supports fair compensation practices in the workplace.

Related Terms

Fair Labor Standards Act (FLSA)Minimum WageTipped Wages