Many Arizona workers, such as wait staff, bartenders and housekeepers are considered “tipped employees.”  State and federal wage laws allow employers to pay “tipped employees” a reduced hourly wage, below the applicable minimum wage. Recall federal minimum wage is presently $7.25, while Arizona state law sets a higher minimum wage, presently $12/hr. The state minimum wage increases annually.  Some local laws set an even higher minimum wage. Because the most favorable law applies, employers (and employees) should look to state (or in the case of the City of Flagstaff), wage and hour laws. Thus, under Arizona state minimum wage law, an employer may reduce the minimum hourly wage for a “tipped employee” by $3 an hour so long as with the tips, an employee still receives at least the applicable minimum wage for each hour worked.

What is a Tip and who is a tipped employee?

A tipped employee is an employee who customarily and regularly receives more than $30 per month in tips, which tips are tracked and reported by employers.

A tip is any amount of money left by a customer as a payment to the employee, rather than to the employer, for services provided. A tip must be voluntarily left by the customer, who has the absolute discretion to determine its monetary value based on the service received.

Thus, a mandatory service fee is not a tip. Although employers may enact service charges, such as an extra fee for a large party at a restaurant, that service charge does not constitute a tip for the employee and is instead collected by the employer. If a customer leaves a tip on a credit card, the employer may deduct the processing fee charged by the credit card company from the tipped amount.

Tip Credits

Both state and federal laws allow an employer to pay tipped employees less than the required minimum wage so long as the employee’s tips make up the difference. For example, if wait staff fails to receive any tips (tracked by the employer) during a shift, the employer must ensure the employee is paid at least the applicable minimum wage for all hours worked, without reduction. Employers should be particularly mindful of training or meetings in which no tips are received and ensure minimum wage is paid. It is the employer’s responsibility to ensure that tipped employees are earning the required minimum wage during their shifts and to make up for any deficiency when tips fall short.

Arizona’s minimum wage laws presently require an employee to be paid at least $12 an hour. Thus, employers may pay tip-based workers $9 an hour based on a $3 tip credit. Some local laws, such as the City of Flagstaff’s, require both a higher minimum wage and a reduction of the amount of tip credits an employer may apply to a tipped employee.  As of January 1, 2021, Flagstaff’s minimum wage is $15.00 an hour, with annual incremental increases including for tipped employees.  As of January 1, 2021, tipped employees working in Flagstaff must be paid no less than $12.00 an hour. In 2022, the Flagstaff minimum wage again rises to $15.50 an hour (or $2 above the State of Arizona minimum wage, whichever is higher), and the tipped employee credit is incrementally reduced by .50 a year until it is eliminated entirely.

Tip Pools

Tips are the property of the employee. Employers may not require an employee to hand over his or her tips unless a valid tip pool has been established.

Pooling tips enable an employer to divide the accumulated amount of tips to be shared by a group of employees. Arizona law allows tip-pooling, but employees cannot be forced to surrender an unreasonable amount of their tips or an amount that results in an effective hourly rate below the state’s minimum wage requirements. Tip pooling may include only employees who assist in serving customers as part of their regular job duties, such as bussers and bartenders. The pool may only be shared among qualified staff and may not be taken or shared with management or owners. Employees receiving tips may only be required to contribute (share) what is customary and reasonable, while still receiving at least the applicable minimum wage for all hours worked after sharing their tips. If a tipped employee is forced to pay a non-tipped employee, he or she must be paid the minimum wage and be reimbursed for the tips that were incorrectly distributed.

Employers who violate these requirements are subject to stiff fines and penalties. Failure to pay minimum wages can subject three times the amount owed. An employee may recover costs and fees as well.

Tracking and Reporting Tips

To claim the tip credit, employers must track and report earned tips to state and federal taxing authorities, including reporting all tips on employee W-2 forms. Employers must withhold taxes and make employer contributions on earned tips. Failure to do so may result in loss of the credit, fines and potential legal claims.

Dual Jobs

When a tipped employee carries out additional job duties, or dual jobs, the tip credit may only be applied to the hours in which the employee regularly and customarily receives tips. For example, when during an 8-hour shift, an employee waits tables for 6 hours but is then be assigned to other duties, such as cooking, a tip credit may not be claimed by the employer for those 2 hours.

Deductions and Overtime Issues for Tipped Employees

Tipped employees may run into a number of issues including deductions and overtime:

  • If an employee does not receive a sufficient amount of tips during his or her work shift that equals the state minimum wage requirements, the employer must pay the difference. All employees, including tipped employees, must receive at least the applicable minimum wage for all hours worked. The tip credit simply allows employers to pay a reduced hourly wage so long as the tips make up the difference to meet at least the applicable minimum wage.
  • If an employee is only paid in tips and receives no wages, the employer must pay the full minimum wage.
  • An employer cannot penalize an employee by reducing his or her earnings below minimum wage due to walkouts, cash-register shortages or breakage.
  • Any deductions (such as for uniforms or tools) may not reduce the employee’s wages below the state or federal minimum wage.
  • Overtime hours for tipped employees cannot be calculated at the reduced hourly wage. In other words, only hours up to 40 in a 7-day workweek can be calculated at the reduced rate. All hours in excess of 40 in a workweek must be calculated at no less than the applicable minimum wage, regardless of tips. Employees must be paid overtime based on a regular rate that includes all service charges, commissions, bonuses and compensation for services provided.

If you are an employee in a service position and believe you have not been paid all that you are due, consult with an experienced employment lawyer today. Don’t delay as there are certain timeframes to pursue wage claims. The lawyers at Faulkner Law Offices, PLLC have decades of experience in wage and hour claims. We can help you recover your hard-earned wages.