For small business owners who bristle over red tape, get ready to chafe.

A new regulation going into effect today requires employers of tipped workers to provide them with advance notice of what's known in the hospitality biz as a "tip credit."

In most states, federal law says that employers may pay tipped employees less than the minimum wage as long as employees earn tips that are above and beyond that amount, or at least $30 a month. The difference between the federal minimum hourly wage, $7.25, and the least an employer can pay a worker per hour, $2.13, is the tip credit. The maximum tip credit employers may receive per worker, per hour is $5.12.

The pendulum also swings in the opposite direction, however. If an employee doesn't earn tips that match -- or surpass -- the minimum wage, the employer must pay the difference. Note further that, rules pertaining to the tip credit are different in every state. Follow this link to find out the tip credit rules for your state, which often trump federal rules.

According to the new rule, which was finalized in April and goes into effect today the Department of Labor outlined information an employer must provide employees if they want to take the tip credit. The notice, written or otherwise, must include the following:

  • The cash wage the employer will pay the employee, which cannot be less than $2.13 an hour
  • The amount of the tip credit, which cannot exceed the difference between the minimum wage and the cash wage nor the amount of tips received by the employee
  • The credit will not apply unless the employee has been informed of the provision
  • All tips must be retained by the employee -- except in the case of a valid tip-pooling arrangement
  • Each time the credit changes, a written notice must be submitted to employees


Although there's nothing new about the way the tip credit works, having to notify employees in advance is a change -- and one that many owners aren't prepared for, says Lee Schreter, an attorney and shareholder with the San Francisco-based employment and labor law firm Littler Mendelson. "The Department of Labor did a poor job of getting information out about the change," she says, adding, "The set of regulations regarding this runs over 100 pages and isn't written with the ordinary business consumer in mind."

Further, "if employers don't give notice or even if they misstep -- maybe the notice doesn't show all the required verbiage -- they cannot claim the tip credit," she says.

Will this new provision have an impact on your business? Let us know how in the comments section.