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How Does A Tip Credit Work? Understanding Your Legal Rights Under Wage and Hour Laws

A server sits outside a restaurant with her head in her hands.

Many restaurants save on labor costs by paying their tipped employees half of the minimum wage. This is called the “tip credit.” Tipped employees typically include servers and bartenders but could include other jobs too, if the employee customarily receives tips.

Employers are permitted to take advantage of this budget-saving partial exemption to the minimum wage requirements only if the employee still averages at least the minimum wage per hour when including the employee’s tips received.

For example, in Ohio, the minimum cash wage an employer can pay a tipped employee in 2023 is $5.05 per hour, as long as the employee’s tips bring their total hourly earnings up to Ohio’s 2023 minimum wage of $10.10 per hour. The federal minimum wage is only $7.25, so the tip-credit rate is $2.13 per hour.

What is the 80/20 rule?

Some employers take this legal inch and stretch it into an illegal mile by having servers perform work that does not generate tips, yet, still pay the labor-cost saving “tip credit” rate.

For example, sometimes servers are required to spend substantial time performing duties that are related to the service of the customers, and therefore related to generating tips, such as “side work” like folding napkins and refilling condiments.

Unfortunately, some employers require the tipped employee to spend so much time doing this “side work” that it detracts from their main job: serving customers and earning tips. This practice could be illegal, depending on how much time is spent doing this “side work.”

The legal framework under which these claims are analyzed is commonly called the “80/20 rule.” This rule applies to tipped employees who perform both tipped and non-tipped duties during their shifts.

What are some examples of the 80/20 rule?

According to the 80/20 rule, if a tipped employee spends more than 20% of their shift performing non-tipped duties or tip-supporting “side work,” the employer must pay them the full minimum wage for those hours.

For example, if a server spends 30 minutes of their 2-hour shift bussing their tables, folding napkins, refilling condiments, etc., they may be entitled to the full minimum wage from their employer for that 30 minutes of work, even if they received tips during that time.

In addition to the 20% percentage threshold, the employer must pay the full minimum wage for any tip-supporting “side work” that exceeds 30 or more minutes at a time.

The 80/20 rule ensures that tipped employees are not taken advantage of by employers who try to use the tip credit mechanism to pay a lower wage for non-tipped work.

The 80/20 rule applies to both federal/FLSA and Ohio minimum wage law.

Also, some employers require tipped employees, such as servers, to open and close the restaurant when there are zero customers because the establishment is not yet open or closed for the day. Zero customers means zero tips.

Yet, some self-serving employers still enjoy the cost savings of paying the server the lower “tip-credit” rate even though there is zero chance the tipped employee can make any tips when opening and closing.

Tipped employees have legal rights

Indeed, some employers require their tipped employees to perform work that has nothing to do with tips generation, like general restaurant cleaning, or worse, cleaning bathrooms. Yet, the employer still takes the cost-saving route of paying the tipped employee the lower tip-credit rate.

In these situations, the tipped employee should be paid no less than the full minimum wage regardless of how much time is spent doing it. If the work has nothing to do with generating tips, then it should be paid at no less than the full minimum wage.

It’s important to understand your rights as a tipped employee and to advocate for fair wages. Tipped employees are a vital part of the service industry and deserve to be compensated fairly for their hard work and dedication.

If you are a tipped employee that has to do opening or closing duties, or substantial side-work, but are paid less than the full minimum wage for that work, you should call for a free consultation to ensure you are being compensated fairly for your work.

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