Common examples of employer abuse of the tip credit include instances where employers compel employees to kickback tips or do not provide employees with the full amount of tips received.
Tip Pooling Arrangements:
The requirement that an employee paid through the tip credit must retain all tips does not preclude a valid tip pooling or sharing arrangement among employees who customarily and regularly receive tips, such as waiters, waitresses, bellhops, counter personnel (who serve customers), busboys/girls and service bartenders. Tipped employees may not be required to share their tips with employees who have not customarily and regularly participated in tip pooling arrangements, such as dishwashers, cooks, chefs, and janitors. However, tip pooling arrangements may not include managers or other employees who are considered agents of the employer.
Only those tips that are in excess of tips used for the tip credit may be taken for a pool. Tipped employees cannot be required to contribute a greater percentage of their tips than is customary and reasonable.
When tips are charged on a credit card, the employer is permitted to pay its employees the tip, after subtracting any percentage the employer may be required to pay to the credit card company for each sale. However, this charge on the tip may not reduce the employee's wage below the required federal minimum wage. Further, the employee must be paid no later than his or her regular pay day; the employer cannot withhold while awaiting reimbursement from the credit card company.
Employers must pay overtime on the full minimum wage rate, and not on the $2.13 per hour tip credit rater. The regular rate for overtime must include all service charges, commissions, bonuses and other remuneration.
In many instances, restaurants mandate a 15% or higher service charge for parties of 6 or more. Surprisingly, under the Federal Laws, this is not considered a tip. However, if, as a result of this charge, the employee receives no tips, the employer must pay the entire federal minimum wage and overtime required. Moreover, some states laws, including New York and Massachusetts, require employers to distribute 100% of the service charge to the servers or other members of the waitstaff if such charges were held out by the employers to include gratuities that would normally be paid to the servers and the customer would reasonably except such a charge to substitute for a tip. For example, in Samiento v. World Yacht, Inc., the New York Court of Appeals held that employees were entitled to 100% of service charges where the charges were included within dinner cruise ticket prices or added when tickets were purchased, and inquiring customers were told that the 20% service charge was remitted to waitstaff as the gratuity.
In some restaurants employees will work in two different areas during their shift -- one where tips are received (e.g., working part of her shift as a waiter) and one where tips are not received (e.g. working part of her shift as a hostess). The tip credit is available only for the hours the employee spends in the tipped occupation. However, an employer may use the tip credit for time the employee spends performing duties related to the tipped occupation, even though such duties are not by themselves directed toward producing tips, provided such duties are incidental to his or her regular duties and are generally assigned to such occupations. Where tipped employees are routinely assigned to maintenance, or where tipped employees spend a substantial amount of time (in excess of 20 percent) performing general preparation work or maintenance, no tip credit may be taken for the time spent performing such duties.