Employers of Tipped Employee’s Beware: You May Be Calculating Minimum Wage Wrong!

In a decision published on March 7th, the Tenth Circuit Court of Appeals, the federal appellate court with jurisdiction over Utah, ruled that a trial court judge had incorrectly dismissed a case in which an employee claimed she was denied minimum wage on portions of her work that were not entitled to a “tip credit.”  In Romero v. Top-Tier Colorado LLC, the court ruled that it did not matter that the employee received minimum wage for the entire week when applying the tip credit to all hours the employee had worked. Instead, the court instructed the trial court to determine whether the restaurant impermissibly applied tip credits to hours the employee did work that was not entitled to an application of a tip credit.  

An example might help understand this decision.  Assume an employee was hired as a waitress, but she was also responsible to do administrative work.  She was hired at $5 per hour with a tip credit.  Further assume that the employee worked ten hours in a week—5 of those hours on administrative tasks and 5 as a waitress—and made $50 in tips in that same week.  If the employer paid the employee at $5 per hour and then was entitled to enhance all of those hours with the $50 tip credit, the employee would have been paid minimum wage and would not be entitled to any more pay.  $50 in wages added to $50 in tips would result in a wage of $10 per hour ($100/10 hours).  However, if the employer were not entitled to apply the tip credit to the administrative hours, the employee would not have been paid minimum wage for the administrative hours because the pay for those hours was only $5.00 per hour, less than the federally mandated $7.25 per hour.  Accordingly, the waitress would be entitled to an additional $11.25 for that week.  

Although as applied to a single week to a single employee an employer’s mistake may have minimal financial impact, the financial impact of an incorrect application of the tip credit could have enormous financial consequences to an employer of many tipped employees.  Employers of tipped employees that rely on those tips to meet minimum wage requirements should therefore carefully review their policies and practices.