Let’s play FLSA error-spotting

Empire Diner pays its servers a tipped minimum wage of $2.83, the permissible tipped minimum wage in the state in which it's located, Pennsylvania. According to the company's payroll records, each employee earns more than the statutory minimum wage, $7.25 per hour.

So far, so good under the Fair Labor Standards Act. So where did Empire Diner make its FLSA mistakes, according to the 3rd Circuit?

1/ Empire Diner never told them that it would be using a "tip credit" under the FLSA to make up the difference between their tipped minimum wage and the statutory cash minimum wage. 

Employers can pay a tipped employee less than the FLSA minimum wage if the employee's cash wage is at least $2.83 per hour and the employee receives at least $7.25 per hour after adding tips. This is known as a "tip credit" provision. An employer, however, can take advantage of the tip credit only if its employees have been informed by the employer of the tip credit and how it operates. If an employer, such as Empire Diner, cannot show that it has informed employees that tips are being credited against their wages, then it cannot take the tip credit and it is liable for the full statutory minimum-wage.

2/ Empire Diner failed to keep any records of tips earned by its servers.

The diner kept no records of tips earned by its employees. Instead, it "guesstimated" tips earned and used that "guesstimate" to pay an hourly wage of $7.63 across the board. As the Court succinctly stated, "A 'guesstimate' untethered to any actual effort to keep track of tips does not constitute accurate recordkeeping." Instead, the FLSA obligates an employer to "maintain accurate records to ensure that all workers are paid the minimum wage for every hour worked."

3/ Empire Diner underpaid overtime.

The diner calculated servers' overtime based on the $2.83 tipped minimum wage, not the full $7.25 minimum wage. That calculation violates the FLSA, as overtime must be calculated based at least on the full minimum wage.

None of these mistakes are all the surprising. FLSA compliance is confusing enough as it. When you add the added wrinkle of a tip credit, compliance becomes that much more complicated. Employers, do yourselves and your bottom lines a favor and pay an employment lawyer to audit your payroll practices and give you some advice on FLSA compliance. It might just be the best money you will spend on your business.