I’m seeing quite a few discussions on social media regarding wages that are below minimum wage in the United States. I’m glad this is getting a lot of attention, but it’s raising more questions and spawning incomplete and incorrect answers. I have some experience with this and thought it might be helpful to share what I know.
For the purposes of examples, I’m going to use the national minimum wage ($7.25), but it works the same way for all sub-minimum wage tipped employees. I’ve been working in this space for 35 years now, so I may gloss over some things that need explaining because I’m just so used to them, so please bear with me.
Here’s how it works:
1. The minimum wage is $7.25/hour. All employees must be paid $7.25 an hour at a minimum.
2. There is something called a “tip credit” that employers are allowed to claim for tipped employees. In most cases, this is an amount of $5.12 per hour. What this means is that the employer can claim that $5.12 an hour worth of an employee’s tips aren’t really tips, they’re wages paid by the employer.
3. To get to $7.25 an hour, the employers must pay $2.13 an hour in addition to the $5.12 an hour tip credit. So, while the employer is effectively paying $2.13 an hour, they are administratively paying $7.25 an hour and meeting minimum wage requirements.
4. Overtime for subminimum wage is weird. The “time and a half” is not $2.13 times 1.5. ($3.20 an hour). It’s $7.25 * 1.5 = 10.88 - 5.12 (tip credit) = $5.76/hour. This is one of the reasons that the distinction between tip credit and a flat $2.13 an hour wage matters. It also affects things like paid vacation, sick pay, etc. If your restaurant is just paying time and a half on a subminimum wage, they are absolutely breaking the law.
5. If an employee does not make $5.12 an hour in tips, the difference must be made up in paid wages by the employer. If the employee only makes (or claims) $4.00 an hour in tips, the employer must add another $1.12 an hour in wages. Employers hate doing this and will usually find a way to get rid of employees who do this.
6. Now, in addition to tip employees being paid at a subminimum wage, there are also indirectly tipped employees and the same rules apply to them. Indirectly tipped employees are employees who are given are paid a portion of the directly tipped employees tips. Jobs within restaurants that qualify to be indirectly tipped are (traditionally) hosts, bussers, food runners, and bartenders (who are directly tipped as well).
7. This one’s a bit technical. There were guidelines for the maximum percentage of a directly tipped employee’s tips that they could be forced to pay to indirectly tipped employees. In Texas, this was 15% of their tips (see section 3b of the Texas Workforce Commission document on Tip Pooling/Tip Sharing). So, let’s do a little math here. I worked 5 hours and I made $50 in tips. My restaurant requires that I contribute 15% of my tips to the indirectly tipped employees, so I pay $7.50 into the tip pool. We’re good, right?
Not quite. The TWC document notes:
However, only those tips that are in excess of tips used for tip credit…may be taken for a pool.
Remember, the tip credit taken by the restaurant means that $5.12/hour of my “tips” are classified as “wages” instead. So, $25.60 (5 hours times $5.12) should be subtracted from my tips before calculating what I contribute to the tip pool. I only made $24.40 in tips, so I should be contributing $3.66. I am actually contributing THIRTY-ONE PERCENT OF THE TIPS I RECEIVED ($7.50 divided by $24.40) TO INDIRECTLY TIPPED EMPLOYEES.
8, There are (or were, in some states) limits to how much non-tipped work a tipped employee can do and still be classified as a tipped employee. This is to prevent employers from using people being paid subminimum wage to do maintenance and cleaning work for most of their shift, knowing that they’d make enough in tips to bring their take for the day above $7.25 an hour. The limit is/was normally 20% of their hours and you had best believe that employers milked this for all it was worth. It’s called “sidework” and it’s pretty unethical.
9. Unfortunately, from 2016-2020, a lot of these guidelines and laws in 7 and 8 were weakened, the interpretations changed, and enforcement of the remaining rules was not pursued. The 15% maximum tip percentage and 20% maximum not-tipped work guidelines are effectively dead in many states.
10. The net here is that tipping and subminimum wage should just be done away with. The practice of tipping is extremely problematic for a number of reasons: It’s racist, it’s sexist, it’s an administrative nightmare that encourages fraud. So when you’re dining out, know this:
* Your server is likely making less than minimum wage as a base wage.
* Much of their time at this wage is spent doing things that don’t generate tips.
* They are forced to share the tips you think you are giving directly to them with the other employees.
This whole thing is stupid, too. If tip credit and subminimum wage were outlawed tomorrow, every restaurant could raise their prices by 20%, which would be no net change to their patrons since they wouldn’t be tipping, and could pay their employees exactly what they were making before with the additional money. There’s literally no change to the outcome except that there’s a lot less administration and now the managers control how their employees are paid instead of the customers.
So, that’s how it all works. Let me know if you have any questions on this. I know it’s complicated and I know I probably assumed that some of this information was more generally known than it is.
-RK
