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  4.  | How a company must pay employees if it takes a tip credit

How a company must pay employees if it takes a tip credit

On Behalf of | Jan 14, 2022 | Blog, Wage & Hour Laws

The Federal Labor Standards Act allows companies to take tip credits based on the number of customer tips their employees receive. As noted by the U.S. Department of Labor, if employees receive a certain amount each month in tips, employers may take tip credits and pay their workers less than the minimum wage.

The maximum tip credit in Indiana may not, however, exceed $5.12 per hour. If, for example, an employee earns the federal minimum wage of $7.25 per hour and receives a $5.00 tip, an employer may claim a $5.00 credit. The employee’s $5.00 tip subtracts from the hourly wage of $7.25 and leaves the employer responsible to pay the worker an hourly wage of $2.25.

Tip credit violations may result in legal actions

As reported by the Indy Star, the U.S. Department of Labor filed a lawsuit against an Indiana restaurant alleging wage violations. The lawsuit claimed 28 servers received only $5 per hour after the employer ordered them to contribute part of their gross wages to a tip pool.

The employer allegedly shared the servers’ pooled funds with the restaurant’s dishwashers and cooks, who do not work for tips. Employers may only claim tip credits for employees who regularly receive tips. One of the restaurant’s owners believed that including the kitchen workers in the tip pool would help build team spirit between the servers and kitchen workers.

Employers may take steps to avoid tip credit violations

To comply with federal and state minimum wage laws, employers may create a reliable method of logging customer tips. In addition to providing proof of compliance, a tip-logging system could help prevent tip credit issues with employees.

If employees report companies for alleged tip credit violations, an employer may face costly legal action. A well-maintained record-keeping system may provide the needed defense.

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