The Minimum Wage Increase: Just the tip of the iceberg

September 1, 2007
Modern Car Care

The problem: As a carwash owner in Florida, you pay several of your most inexperienced workers the federal minimum wage. Well, you pay about half the amount, but it’s OK because you know that your employees receive tips. You don’t count the tips, and you don’t keep any for yourself, but you see them pocket money while they’re working the line. You take advantage of the “tip credit” set out in the 1996 version of the Fair Labor Standards Act (FLSA), which hasn’t changed, and you pay some of your employees $2.13 an hour. Months go by, and you get hit with a lawsuit. One of your former staff members claims he was underpaid, and now you’re knee-deep in legal fees and paperwork, searching for a way to prove he earned plenty of tips – to prove you paid enough.

When the U.S. Congress raised the minimum wage to $5.15 in 1996, it made a provision for employers whose workers earn tips. The magic wage of this “tip credit” was set at $2.13 an hour, an amount that can be paid only in certain circumstances. Though the FLSA was amended this year in order to bring the federal minimum wage up to $7.25 by the summer of 2009, this lower tip wage will not get any higher. While that sounds like good news to some of you, it can be dangerous.

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Carolyn Richmond is a partner in the New York City office of the national law firm Fox Rothschild. She represents and counsels clients in a variety of labor and employment matters, including wage and hour issues. She says that employers need to be cautious – sometimes the federal law is just a floor. “If state law provides greater benefits to an employee – state law prevails,” she says. “Other states have a smaller tip credit. It is really imperative for business owners to not only keep track of the changing minimum wage rates, but also whether a tip credit is permitted in their jurisdiction.”

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