As an employer in Tennessee, you must comprehensively understand tip laws that govern your business. Complying with these regulations ensures fairness for your employees and protects your business from potential lawsuits.
Generally, the tip laws for Tennessee employers are governed by federal wage and hour labor laws. In this article, we will delve into the main tip laws that affect employers in Tennessee, including your responsibilities and strategies to avoid legal issues. Contact us today to speak with a Tennessee employment law attorney!
What Is a Tip?
A tip is money an employee receives in addition to the charge for products or services and tax. However, the rules might differ if the employer imposes a mandatory service charge or the customer pays by credit card.
What Laws Affect an Employer’s Tip Policies in Tennessee?
Currently, Tennessee does not have any state laws setting a minimum wage for workers. Therefore, the Fair Labor Standards Act (FLSA) governs Tennessee tip laws for employers. Generally, the FLSA requires that employees keep their tips. However, employers can claim tip credits and require tip pooling.
Although Tennessee does not have a state minimum wage law, the federal minimum wage laws apply to all employees. Tennessee employees are entitled to the full federal minimum wage of $7.25 an hour in 2023.
Under the FLSA, employers in Tennessee may claim what is referred to as a “tip credit.” This credit means an employer can pay tipped employees a lower wage than the federal minimum wage. An employer can claim a maximum tip credit of $5.12 per hour, and pay tipped employees $2.13 per hour. However, an employee’s tips must make up the difference so that they make at least minimum wage including tips. So, you must make up the difference if your employee doesn’t earn at least $5.12 an hour in tips.
The FLSA also governs the laws for tip pooling in Tennessee. Employers can require tipped employees to share their tips with other employees who customarily and regularly receive tips. People who don’t normally receive tips, such as cooks, dishwashers, and bussers, cannot be included in the tip pool.
IRS Mandatory Service Charge Rule
An important rule to note for employers is the 2014 rule change by the Internal Revenue Service (IRS) that requires any portion of the mandatory service charge that an employer pays to their employees to be treated as wages, not tips. This means the employer must withhold and pay Medicare and Social Security tax on these amounts and include them as part of their employees’ hourly wage.
How Can Employers Avoid Employee Lawsuits Regarding Tips?
Employer tip requirements should be diligently followed. To avoid employee lawsuits regarding tips, there are common pitfalls employers should avoid.
Failing to Follow the Notice Requirement of Tip Credit
Before employers can claim a tip credit, you must provide the following notice information to each tipped employee:
- The amount of the base wage being paid to the tipped employee and the amount of the tip credit portion of the wages, which cannot exceed $5.12;
- The amount of the tip credit claimed by the employer cannot exceed the amount the tipped employee earns in tips;
- The tipped employee may retain all tips with the exception of those subject to a valid tip pooling arrangement, which should be limited to employees who customarily and regularly receive tips; and
- The tip credit will not apply to any tipped employee unless the employee has been informed of the information contained in this notice.
A best practice for employers includes providing this rule in writing to all employees when they are hired.
Miscalculating Overtime Compensation
It is important to remember that if you claim a tip credit, overtime is calculated using the full minimum wage, not the lower wage payment of $2.13.
Tip Pooling Wage Violations
A common violation is paying tip pooling compensation to employees who are prohibited from sharing tip pooling or not fairly compensating those who have a right to share in the tip pooling arrangement.
Failing to Make Up the Difference in Minimum Wage
An employer must make up the difference if a tipped employee’s wages don’t equal at least the minimum wage when you add their tips to their minimum wage hourly pay. Employers should check to ensure that all employees are making at least minimum wage.
Maintain Accurate Records
Many employers fail to be diligent in their recordkeeping. Employers should maintain accurate records of all tips collected and distributed. This documentation can be invaluable in case of audits or disputes.
Contact an Attorney
To create a fair and legally sound work environment, understanding and complying with Tennessee’s tip laws is essential for employers. By following the regulations and establishing clear policies, you can avoid employee lawsuits and maintain a work atmosphere that benefits both your business and your employees.
An employment attorney can help you navigate the complicated area of Tennessee tip laws. Batson Nolan is an “AV Preeminent” rated law firm that has been providing exceptional legal services to its clients in Tennessee since 1860. Our experienced employment lawyers are ready to protect your rights with a personalized legal strategy. Contact us today for an initial consultation.