What is a Tip Credit?

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Many workers in Ohio earn a large portion of their wages through gratuities. But just because an employee receives tips doesn’t mean that their employers aren’t required to pay them fairly. While employers are permitted to apply a “tip credit” under both state and federal law, they must still pay their tipped employees a minimum wage.

A tip credit simply means that an employer may count an employee’s tips toward meeting the minimum wage requirements. It doesn’t mean they can avoid their legal obligations. If a tipped employee doesn’t earn enough in gratuities to satisfy the state minimum wage, the employer must make up the difference to comply with the federal and Ohio tip credit laws.

What is a Tip?

If you’re a worker who relies on tips for a substantial portion of your income, you may be wondering “what is a tip credit?” However, it’s crucial to first understand what legally constitutes a “tip.” A tip, also commonly referred to as a “gratuity,” is defined under the federal Fair Labor Standards Act as “a sum presented by a customer as a gift or gratuity in recognition of some service performed for the customer.”

While tips are often paid in connection with a service, they are differentiated from the payment for the charge of the service. The amount of a tip and whether one should be given at all is solely at the discretion of the customer. Although an employer is entitled to the profits they make from the performance of an employee’s services, they are prohibited from keeping their tips under both the federal and Ohio tip credit laws. A mandatory service charge typically doesn’t count as a tip.

Who is Considered a Tipped Employee?

Under Ohio law and the Fair Labor Standards Act, tipped employees are defined as those who regularly receive more than $30 per month in tips, such as those who are employed in the hospitality and food services industries. Significantly, tipped workers usually rely on gratuities for a substantial portion of their wages. They are not employees who only earn tips occasionally or during the holiday season.

What is a Tip Credit?

Importantly, there are minimum wage laws in place at both the federal and state levels that protect employees, regardless of whether they are tipped or not. In Ohio, the minimum wage an employee must be paid in 2023 is $10.10. However, employers are legally allowed to pay an employee less than the minimum wage if they are paid in tips — as long as they make up the difference. In other words, employers who use a tip credit must be able to show that a tipped employee receives at least the minimum wage when their cash wages and the tip credit amount are combined.

Employers may take a tip credit of 50% in Ohio. This means employers are currently allowed to pay tipped employees $5.05 an hour, provided the employee earns enough in tips to bring the total amount of their hourly wage up to the statewide required minimum wage. In cases where an employee has a dual job and spends some of their time performing non-tipped duties that support tipped work, the employer is permitted to take a tip credit for the amount of time the employee spends performing such duties. However, they may not take a tip credit for directly supporting work that exceeds 20% or more of the employee’s work week or that is performed for more than 30 continuous minutes at a time, including time spent waiting for customers.

What is a Tip Credit Notice?

In order for an employee to claim a tip credit, they must be given actual notice of the employer’s use of the tip credit system. Specifically, the notice must be provided before the tip credit is taken. A proper Ohio tip credit notice must communicate the following to employees:

  • The cash wage they will be paid (this must be at least $5.05 in Ohio)
  • The amount of tip credit the employer is claiming
  • That the tip credit the employer is claiming cannot exceed the total amount of tips actually received by the employee
  • That all tips received by the employee are to be retained by the employee, unless a valid tip pooling arrangement is in place
  • That the tip credit will not apply to any tipped employee unless the employee has been informed of the tip credit rules

In the event an employer does not provide notice to employees regarding the tip credit system, it must pay tipped employees at least the statutory minimum wage for every hour worked. If an employer does not give notice of their tip credit policies to employees but still takes a tip credit, they are in violation of both Ohio and federal law.

Contact an Experienced Ohio Tip Credit Attorney

If your employer violated the federal and Ohio tip credit laws, you may be entitled to take legal action — and recover the wages you were wrongfully denied. Located in Westlake and offering skillful representation to clients throughout Ohio, employment law attorney Chris Lalak is committed to fighting for the rights of workers who have been wronged by their employers and denied the wages they are legally entitled. Contact Lalak LLC today to schedule a free, confidential, no-obligation consultation and learn how we can help.