Misunderstood tip credit cost.

Employers are playing mayor wage-hour penalties simply because they do not know how federal law defines “tips.”

First, federal law defines a tipped employee as an employee who “customarily and regularly” receives more than $30 a month in tips. If a worker qualifies under federal law as a “tipped employee,” the employer may credit a portion to the tips he or she reported to the employer toward the required minimum wage rate. The maximum amount that employer can credit toward the minimum wage under federal law is $5.12 an hour, but some states have lower maximums.

Second and the key to costly misunderstandings is that federal law defines “tip” as voluntary payment from a customer who must also determine the amount. The amount cannot be dictated by employer policy or be negotiated with the employer.

For example, a hotel’s mandatory 18% gratuity for banquet service is not a “tip” under federal law.

A 1996 FLSA amendment replaced the term “tip credit” with “minimum cash wage for tipped employees.”

Advice: To shift the focus from that the employer does not have to pay a tipped employee to the minimum hourly “cash” wage the employee can receive.

The applicable minimum wage rate must equal the maximum tip credit plus minimum cash wage at all times.