While many individuals are familiar with how overtime calculations work, this calculation is often times made more difficult in the case of tipped employees. In this blog, I am to shed some light in some of the most often seen errors that are seen by both employers and employees in calculating overtime rates.
Most, if not all, people are aware of the requirement imposed by the Fair Labor Standards Act (“FLSA”) that all covered employers must pay their employees a minimum wage of $7.25 for every hour worked. Moreover, most people are familiar with the fact that if you are a tipped employee an employer is able to take what is often referred to as a “tip credit” whereby an employer is allowed to pay an employee as little as $2.13 an hour. This is of course with the assumption that the employee in question is still making at least $7.25 an hour after the total sum of tips they receive are taken into account.
The inquiry with tipped employees does become murkier with regards to what is the proper overtime rate. Under the FLSA overtime is paid at a rate of time and a half of an employee’s regular rate, but with tipped employees this calculation often leads to various errors. For example, some employers attempt to calculate their tipped employee’s overtime pay based on their tip credit rate of $2.13 an hour. In other words, some employers claim that a tipped employee’s overtime rate is only $3.20 an hour. This is incorrect. On the other hand, some individuals believe that the true regular rate at which overtime is calculated is whatever their hourly rate with tips included is correct. This means that if on average an employee makes $10 an hour after tips, their overtime rate should be $15 an hour. This is also incorrect.
The Department of Labor (“DOL”) has issued regulations that the actual regular rate at which a tipped employee’s overtime pay is calculated is actually $7.25. Indeed, under 29 C.F.R. §531.60, any tips received by an employee in excess of the tip credit need not be included in the calculation of the regular rate for overtime purposes. U.S. Department of Labor, Wage and Hour Division Opinion Letter FLSA2021-5. This means that no matter how many tips an employee receives, the overtime rate owed to them by the employer for hours worked over 40 is still only $10.88. This of course applies only to payments that are considered tips under the FLSA.
A major, and often overlooked, payment that is not considered a tip are services charges. Service charges are defined as compulsory charges that are paid to the employer and not the employee. Nonetheless, often times the employer provides these payments to its employees. When that occurs the DOL has stated that this amount must be used in calculating the regular rate of an employee for overtime purposes.
To illustrate all of this, the DOL has provided the following example:
Total Straight Time Wages:
· 18 hours worked as a server × $7.25 per hour ($2.13 cash wage + $5.12 tip credit) = $130.50
· 3 shifts worked as a bartender × $75.00 per shift = $225.00
· $130.50 + $225.00 + $160.00 (service charges)3 = $515.50 (total straight time pay)
Regular Rate of Pay Calculation: •
· $515.50 (total straight time pay) / 42 (total hours worked) = $12.27 (regular rate of pay)
Overtime Pay Due:
· $12.27 (regular rate of pay ) × .5 (half-time due for all hours worked over 40) × 2 (overtime hours) = $12.27 (overtime premium due)
U.S. Department of Labor, Wage and Hour Division Opinion Letter FLSA2021-5
As can be seen above, it is not always crystal clear how to go about calculating one’s overtime. This is especially true if you are a tipped employee. That is why it is it is imperative to seek out an attorney that specializes in employment law to assist you if you feel you are not being adequately compensated for your work. At Wiley Walsh, P.C. we specialize in employment, and we are more than happy to go over your situation so that we can assess what we are able to do for you. Feel free to contact us to schedule an appointment with one of our attorneys.