What is the tip credit system?
Since tips are a normal and expected part of the restaurant industry, employers can factor tips into a server’s minimum wage. Essentially, an employer can pay servers less than minimum wage because they expect tips to make up the difference.
The absolute minimum an employer can directly pay a server is called the base wage. The base wage is currently $2.13 an hour. But Virginia’s minimum wage is $12.41 per hour.
So from this we can determine that the maximum tip credit is $10.28 per hour ($12.41 – $2.13). However, the maximum tip credit can vary from state to state depending on their minimum wage.
What if tips do not fulfill minimum wage?
If the sum of a server’s tips and base wage don’t add up to minimum wage, then the employer must pay the difference. They must provide “make-up pay” so all employees are paid at least minimum wage.
That’s why it is vital for employers to closely monitor tips. If they don’t they might end up underpaying employees which can incur a violation.
What’s the formula for calculating tip credits?
For each hour worked:
- If (Base Wage + Tips Received) ≥ Minimum Wage then you don’t have to provide make-up pay.
- If (Base Wage + Tips Received) < Minimum Wage, then you do have to provide the difference in make-up pay.
For example: If a server gets an average of $9 in tips an hour…
- $2.14 + $9.00 = $11.14
- $11.14 < $12.41
- $12.41 – $11.14 = $1.27
So the employer would have to pay this server an additional $1.27 on top of the base wage to reach minimum wage. Still, the employer is only directly paying this server $3.41 an hour.
What happens if a server’s tips exceed the maximum tip credit?
If a server’s hour tips exceed the maximum tip credit of $10.28 they are completely entitled to those extra tips. Employers CANNOT take or withhold these extra tips. The idea is that servers are incentivized and rewarded for their good work with more income.
Employers can only use up to the maximum tip credit to offset their direct wage obligations. If a server earns $20 in tips per hour, the employer only has to pay that server $2.13 an hour.
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Disclaimer: This blog post is for informational purposes only and should not be construed as legal advice. Always consult the official resources and seek legal counsel if necessary for complete and accurate information regarding specific regulations and practices.
