Your Alabama employer is legally allowed to pay you less than the minimum wage, as long as you earn enough in tips to bring your hourly rate up to the Alabama minimum. You can also be required to share or pool your tips with other employees, in some circumstances.
If you earn tips, you should know the rules about
- what counts as a tip
- how much your employer must pay you in addition to your tips, and
- whether and how much you can be required to contribute to a tip sharing arrangement (also called a “tip pool”).
Under federal and Alabama law, tips belong to the employee. An employer can never take employee tips and keep them for itself. However, an employer may be allowed to take a “tip credit” – to count part of the tips an employee earns towards the employer’s obligation to pay the minimum wage. Employers may also be allowed to require employees to share their tips with each other and to pass on certain costs – such as credit card processing fees – to employees by docking their tips.
Is your employer giving you all of the tips to which you are legally entitled? To find out, you first have to understand what money counts as a tip.
What Is a Tip?
Tips – also called gratuities – are money a customer gives directly to a service employee, such as a waiter, delivery driver, bellhop, cleaning staff, or counter person. They are called “gratuities” because they are, legally speaking, a gift: In exchange for good service, the customer provides a little something extra to compensate the person who provides the personal service, in addition to the cost of the meal, ride, hotel room, and so on that goes to the employer. Although tipping is customary, it isn’t required. A customer could walk out of a restaurant after paying the bill to the penny without leaving a tip. That customer would be unpopular, but would not be a criminal.
Mandatory Gratuities and Services Charges
If your employer imposes a mandatory charge on customers for service – for example, for parties of eight or more at a restaurant, or for catered meals or hotel events – that typically doesn’t count as a tip. Your employer can keep all of that money, even if the patrons don’t leave an additional amount for you. Although some employers pass all or part of these services charges on to employees, they aren’t required to.
How can you tell whether a customer has paid a mandatory service charge – which your employer can keep – or a tip to which you are legally entitled? The Internal Revenue Service says tips must meet all of these criteria:
- The customer is free to decide how much to leave. Although the employer may suggest an amount, the customer can decide how much to tip.
- The payment is voluntary, not mandatory.
- The employer does not determine the amount based on its policy (for example, that parties of six or more will be charged an 18% “mandatory gratuity”) or negotiate the amount with the customer (for example, for a catered event).
- The customer has the right to decide who gets the money – by, for instance, handing the money directly to a server or bartender.
A few states, including New York, require employers to clearly notify customers that the service charge goes to the house, not to the employees who served them. If your employer doesn’t post the legally required notice, employees might be entitled to keep the charge as a tip. Contact the Department of Labor, Wage and Hour Division to find out the current rules in Alabama.
Credit Card Fees
When an employer pays by credit card, the credit card issuer often assesses a percentage of the total charge as a processing fee. In most states, employers are free to deduct this same percentage from your tip. For example, if the customer paid $100 on a credit card for a bill of $80 plus a tip of $20, and the credit card company charged a fee of 3%, your employer could take 3% of your tip and pay you only $19.40.
A few states follow a different rule. In California, for example, employers may not pass these fees on to employees. They are considered a cost of doing business, to be borne by the employer. This means California employees are entitled to the full tip left by the customer, and the employer must pay the full processing fee to the credit card company.
Employees in every state must be paid at least the minimum wage, including employees who earn tips. Employees are entitled to the highest minimum wage that applies to them, whether federal, state, or local.
Alabama does not have its own minimum wage law. Therefore, employees in Alabama are entitled to earn at least the federal minimum wage, $7.25 an hour.
Some states allow employers to take a tip credit: to count all or part of an employee’s tips towards the minimum wage, then pay the employee a lower hourly amount. Not all states allow a tip credit, but employers in Alabama may take one.
In Alabama, your employer may pay you a minimum wage of $2.13 an hour, as long as you earn enough in tips to bring your total hourly pay up to the full minimum wage, $7.25 an hour. If you don’t earn enough in tips to bring your compensation to the full minimum wage, your employer must make up the difference.
Tip Sharing and Tip Pools
Federal law allows employers to require tipped employees to share or pool their tips with other employees. Employees who receive tips must pay a certain percentage or amount into the pool, to be divided among a group of employees. If your employer takes a tip credit, employees may participate in a tip pool only if they regularly receive tips themselves. For example, wait staff, bartenders, and bussers in a restaurant might share tips, but the cooks, bookkeeper, and reservations clerk may not take a share of the pool.
Employers, managers, and supervisors may not take any part of a tip pool. The Department of Labor recently clarified tip rules for managers and supervisors. If managers or supervisors receive tips from customers for services that these employees directly and solely provide, they may keep those tips. Managers and supervisors may also contribute to a tip pool. However, they may not receive tips from the tip pool.
Your employer may count only the actual tips you receive towards the tip credit. If you are pooling tips with other employees, this means the money you receive from the pool, plus the portion of your tips you keep, plus the compensation you receive from your employer must add up to at least the minimum wage. Your employer may not count the money you have to put into the pool, because you aren’t keeping that money.