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Understanding Tipped Overtime Calculations

Restaurant manager making new suggestions to the employees

Dirk Ahlbeck, CPA | Principal | National Restaurant Practice Lead

Under the Fair Labor Standards Act (FLSA), most restaurant employees are classified as non-exempt and entitled to overtime pay of 1 and ½ times their regular rate of pay. Calculating overtime pay can be challenging, especially for tipped employees.

Employers should not assume overtime is calculated the same for tipped employees as all other staff members. Miscalculating overtime payments for tipped employees could result in dissatisfied employees (with a greater risk of turnover) and Department of Labor (DOL) issues. Overtime pay is calculated based on the full minimum wage, not on an employee’s basic wage before tips.

What is the definition of a “tipped employee”?

Tipped employees are generally those that earn $30.00 or more a month in tips/gratuity. Some states may have a lower cut off – be sure to confirm the state in which the restaurant is registered for specific laws. Tipped employees’ salaries are made of basic cash wages and any tips received during work hours. Employers are responsible for making up the difference to minimum wage per state. Maximum tip credits also differ by state.

Avoid this common mistake with tipped employees

  • Restaurant owners should avoid a common mistake when calculating overtime:

Employers should not use the cash wage for employees, nor the cash wage + tipped credit as the base rate.

How to calculate overtime for tipped employees

Overtime pay is calculated based on the full minimum wage, not on an employee’s basic wage before tips. Keep in mind that employers can deduct the tip credit, but only at the same rate (not higher) for overtime as for normal pay. To begin, use this equation:

  • Start with minimum wage X 1.5 = overtime rate

Overtime rate is less applicable tip credit, which is the difference between minimum wage less rate of pay. Multiply this by the number of hours worked. For example, a restaurant employee’s minimum cash wage is $14.00, and the tip credit is $4.00, the difference between the minimum wage-tip credit is $10.00 which is the rate of pay of the employee. So, the tipped overtime rate is $21.00-$4.00=$17.00 then.

  • $14.00 x 1.5 = $21.00
  • In this scenario, assume the employee worked 10 hours of regular time and three (3) hours of overtime.
    • $10 x 10 hours = $100.00
    • $17 x 3 hours = $51.00
    • Total wages without tips = $ 151.00

Calculating overtime with tipped employees can be tricky, but restaurant owners must be diligent in wage calculations for both Department of Labor standards and overall employee satisfaction.