The Fair Labor Standards Act, or FLSA, is a federal law that sets basic standards for minimum wage and overtime pay. Although the rules might seem straightforward, when employees are tipped (such as in restaurants) or work in retail establishments, complying with the FLSA becomes a little more complex.
FLSA Minimum Wage Rules
By definition, tipped employees are those who customarily and regularly receive more than $30 per month in tips. For such individuals, the FLSA permits an employer to use these tips as a credit against its minimum wage obligation. Specifically, the employer may take a tip credit equal to the difference between a reduced hourly wage that is set by law (known as the required cash wage or direct wage) and the minimum wage. The use of a tip credit must be explained to the employee in advance, and only tips actually received by the employee may be counted in applying the credit. In total, the employee must receive at least the federal minimum wage. If the employee's tips combined with the employer's direct wages do not equal the federal minimum hourly wage, the employer must make up the difference. Additionally, unless they are participating in a valid tip pooling or sharing arrangement, employees are entitled to keep all of their tips. An employer must notify tipped employees of any required tip pool contribution amount, and may only take a tip credit for the amount of tips each tipped employee ultimately receives.
Most retail employees are also entitled to the minimum wage. Employees paid on a commission basis, or who are paid a commission in addition to an hourly rate, are covered by the FLSA minimum wage rules just as any other non-exempt employee. As with any other pay method, the commission pay method may in no case result in an employee being paid less than the minimum wage for all hours actually worked.
FLSA Overtime Rules
In general, the FLSA overtime rules require that covered non-exempt employees receive overtime pay for hours worked over 40 per workweek at a rate not less than one and one-half times the regular rate of pay.
Where an employer takes the tip credit, overtime is calculated on the full minimum wage, not the lower direct (or cash) wage payment.
Certain retail employees paid on a commission basis either in whole or in part may be exempt from the overtime pay requirements of the FLSA. Three conditions must be met for an employer to use the exemption. First, the employee must be employed by a retail or service establishment. Second, the employee's regular rate of pay must exceed one and one-half times the applicable federal minimum wage for every hour worked in a workweek in which overtime hours are worked. Finally, more than half of the employee's total earnings in a representative period must consist of commissions. Unless all three conditions for the retail commissioned employee exemption are met, overtime premium pay generally must be paid for all hours worked over 40 in a workweek at time and one-half the regular rate of pay.
Keep in mind that a number of states have enacted minimum wage and overtime pay laws, some of which provide greater worker protections than those provided by the FLSA. In situations in which an employee is covered by both federal and state wage laws, the employee is entitled to the greater benefit or more generous rights provided under the different parts of each law.
To learn more about the FLSA minimum wage and overtime pay requirements, visit us at HR360.com.