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How to Calculate Overtime Pay for Tipped Employees

Calculating overtime pay can be a challenge at the best of times, and when you’re dealing with tipped employees it can turn into a real headache. The problem is, many employers assume that overtime is calculated the same for their tipped employees as everyone else.

That’s not the case, but it’s important that businesses get it right—or they’ll have dissatisfied employees and the Department of Labor on their backs. The good news is, Paycor Payroll automatically calculates overtime pay so our clients can stay compliant without worry.

However, it’s still good practice for all employers to understand how calculating tipped employees overtime pay works. Let’s go step-by-step.

Who Is Considered a Tipped Employee?

A tipped employee is anyone who generally makes $30 or more a month in tips (though some states have a lower cutoff). If you’re making payroll for a restaurant, this will likely include a big chunk of your staff.

We’re usually talking about those whose basic cash wage is less than the federal, state or local minimum wage and so require tips (or employer credits) to reach that.

For a full rundown of requirements by state, read this list provided by the Department of Labor.

Tipped Minimum Wage Laws

The Fair Labor Standard Act (FLSA) sets the federal minimum cash wage for a tipped employee at $2.13 per hour. That’s what a tipped employee must receive in cash, excluding tips. The minimum cash wage differs across the country—by state or locality, but also by company size and industry. Employers are always required to pay employees the highest applicable minimum wage (federal, state, or local) for their work location.

Some states follow the federal standard, while others require employers to pay the full state minimum wage before tips. Others states set a higher minimum cash wage than the federal standard but still lower than the standard non-tipped minimum wage for the state.

When Paying Tipped Workers

 

For regular hours, tipped workers’ salaries will comprise of a basic cash wage plus any tips. If this combined amount does not reach the highest of all applicable federal, state or local minimum wages, then employers are responsible for making up the difference.

In some areas, though, employers may be able to claim a tip credit against their minimum wage obligation. Under DOL rules, a tip credit is determined by taking the federal hourly minimum wage rate ($7.25) minus the minimum cash wage for tipped employees ($2.13), which works out at $5.12 per hour. However, a tip credit cannot exceed the amount of tips actually received by the employee. Employers should also be aware that the maximum tip credit differs by state.

The Mistake Many Employers Make

 

When calculating overtime, you take an employee’s hourly rate and add the required multiplier for any eligible excess hours. It’s usually relatively easy to figure out a non-tipped employee’s regular rate of pay. But what is the regular rate for a tipped employee?

Some employers mistakenly believe that this is just the cash wage or the cash wage plus tipped credit. However, if this is the base rate you use for calculating employee’s overtime, you’re making a big error.

How to Calculate Overtime for Tipped Employees

 

The trick is, overtime pay is calculated based on the full minimum wage, not on an employee’s basic wage before tips. Unlike non-discretionary bonuses, tips are not included in the regular rate. Employers can deduct the tip credit, but only at the same rate (not higher) for overtime as for normal pay.


Examples

Let’s look at how that works in practice, using examples of three states with different regulations. We will assume that the employer pays one and a half times (1.5) the regular rate of pay for overtime hours.

Texas

Let’s take a tipped employee in Texas, where they follow federal standards for the minimum wage, the minimum tipped wage and tip credit. They do, however, have a broader definition of a tipped employee: anyone who generally earns more than $20 per month in tips. To calculate overtime pay, you take an employee’s regular hourly rate and multiply by 1.5. For an employee earning the minimum wage of $7.25, this comes to $10.875.

Minus the tip credit of $5.12, the minimum cash overtime rate is $5.755 (rounded to $5.76). Remember though, if an employee doesn’t reach $5.12 per hour in tips, the employer is responsible for making up the difference.

New Jersey

Now here’s another example, this time from New Jersey. A tipped employee may usually earn the state’s basic minimum cash wage of $3.13, but their overtime pay will be based on the state’s full minimum wage of $11. This is multiplied by 1.5 which makes $16.50. This is the minimum that employees are guaranteed per overtime hour.

However, for how much an employee is guaranteed to earn directly from their employer you must then subtract the tip credit of $7.87 to get the basic overtime cash rate of $8.63 per hour.

Oregon

We’ll end with an easy one. Oregon is one of several states which does not allow a tip credit. As a result, Oregon employers are required to pay all employees the state minimum wage, regardless of tips. So, you’ll simply calculate a tipped employee’s overtime like you would any other employee. If an employee is earning the minimum wage—which for non-urban counties in Oregon is $11.50—this would be multiplied by 1.5 to get $17.25.


Paycor Can Help

Paycor builds HR software for leaders of medium & small business. For 30 years, we’ve been listening to and partnering with leaders, so we know what they need: HCM technology that saves time, powerful analytics and expert HR advice to help them solve problems and achieve their goals.

Paycor is not a legal, tax, benefit, accounting or investment advisor. All communication from Paycor should be confirmed by your company’s legal, tax, benefit, accounting or investment advisor before making any decisions.