Getting Tippy: Calculating Overtime For Employees Who Perform Tip-Credit and Non-Tip-Credit Positions

By Elizabeth Chilcoat

This week, the U.S. Department of Labor issued an opinion letter, FLSA021-5, explaining how to calculate an employee’s regular rate of pay and overtime when an employee performs both tip-credit and flat-rate work in a workweek. The regular rate is a weighted average of all pay rates for all hours worked. The only tips that are included in the calculation are the tips claimed as part of a tip-credit. Non-discretionary service charges or automatic gratuities, such as those assessed on large parties, are not considered tips and must be included when calculating an employee’s regular rate of pay.

The first step in calculating an employee’s overtime rate is determining the employee’s total straight-time pay for the workweek. 

In the example given by the DOL, the employee’s straight-time earnings were the sum of the minimum wage for all hours spent in the tip-credit position (allocated as $2.13/hour cash wage and $5.16/hour tip credit), the flat-rate for each flat-rate shift, and all non-discretionary service charges or gratuities paid to the employee. The regular rate is then calculated by dividing the employee’s straight-time earnings by the total number of hours worked. 

Finally, the employee’s overtime pay is calculated by multiplying the regular rate by .5 by the number of overtime hours worked in the workweek.

Employers should bear in mind that many states and some cities set a higher minimum cash wage and lower maximum tip credit for employers who claim the tip credit than federal law, while others prohibit a tip credit entirely. Six states (California, Minnesota, Montana, Nevada, Oregon, and Washington) entirely prohibit employers from claiming a tip credit. Employers in those states are required to pay the full minimum wage to their employees without including any amount for tips. Twenty-seven states (Arizona, Arkansas, Colorado, Connecticut, Delaware, District of Columbia, Florida, Hawaii, Idaho, Illinois, Maine, Maryland, Massachusetts, Michigan, Missouri, New Hampshire, New Jersey, New Mexico, New York, North Dakota, Ohio, Oklahoma, Pennsylvania, Rhode Island, South Dakota, Vermont, Wisconsin, and West Virginia), the District of Columbia, and most Territories of the United States currently set a higher minimum cash wage and permit a lower maximum tip credit than federal law. For example, to satisfy Arizona’s $12.15/hour minimum wage, an employer must pay a minimum cash wage of $9.15 per hour and may claim a maximum tip credit of only $3.00/hour. Colorado’s current $12.32/hour minimum wage requires a $9.30/hour minimum cash wage and $3.02/hour maximum cash wage. Some states, like Connecticut and New York, have different rules for different types of tipped occupations. And, Hawaii conditions an employer’s use of a $0.75/hour tip credit on the employee earning at least $7.00/hour more than the applicable minimum wage when the employee’s cash wage and tips are combined. A comprehensive list of minimum wages, minimum cash wages, and maximum tip credits in each state is available from the U.S. Department of Labor, here.  

This patchwork of regulation may be reduced or eliminated if the incoming Biden administration makes good on its goal to raise the national minimum wage to $15.00/hour. Because state and local tip credit rules vary and can include limitations on those eligible to receive tips, tip pooling, and tip calculations, employers are encouraged to seek legal advice regarding tipped employee compensation.