Compensation &; Payroll
Federal Minimum Wage Increase Will Raise 'Tip Credit'
Q: I have tipped employees. How does the new Fair Minimum Wage Act of 2007 affect their pay and tip credit?
A: The Fair Minimum Wage Act of 2007, signed into law by President Bush on May 25, 2007, does not change the per hour minimum that must be paid in cash to tipped workers; it will only serve to increase the “tip credit” that an employer is allowed to take for the difference between the minimum wage and the hourly amount it pays its employees.
The act increases the federal minimum wage for the first time in 10 years. In a three-step process, it will increase to $5.85 on July 24, 2007; $6.55 on July 24, 2008; and $7.25 on July 24, 2009. But since a 1966 amendment to Section 3(m) of the Fair Labor Standards Act (FLSA), employers with tipped employees have enjoyed a benefit of reducing the cash minimum wage required to be paid to tipped workers, declaring a “tip credit” for the difference between the standard federal minimum wage and the “cash” minimum wage for tipped employees, when that difference is made up by the tips earned by the employees.
In 1996, Section 2105(b) of the Small Business Job Protection Act amended section 3(m) of the FLSA to set the minimum cash wage for tipped employees at $2.13 per hour, or 50 percent of the minimum wage at that time, which was $4.25. The law did not amend the FLSA to raise the tipped employee minimum cash wage in conjunction with any future federal minimum wage increases; rather, the rate set was static and has not been changed since.
Therefore, the new federal minimum wage increase does not change the $2.13 per hour minimum that must be paid in cash to tipped workers; it will only increase the “tip credit” that an employer is allowed to take for the difference between the federal minimum wage and the $2.13 per hour they must pay their employees in cash.
Of course, if the $2.13 per hour and the tips the employee earns combined do not equal the new federal minimum wage per hour, the employer must still make up that difference in cash to the employee.
State minimum wages also may come into play, as some states do not allow tip credits to be taken at all, or they may have higher cash minimums for tipped employees, or may index theirs against any minimum wage increases.
Article by Shari Lau, SPHR, GPHR, is manager of SHRM's Information Center from http://www.shrm.org/kc/solutions/articles/archives/CMS_021887.asp#P-8_0