The Massachusetts Wage Act, which strictly requires employees to be paid on time and in full, comes with many traps for the unwary. This is particularly the case for employers who have tipped employees. It can be a large employer inadvertently paying thousands of employees improperly over many years due to a few key formula errors, or a midsize-to-small employer relying on a third-party payroll provider (only to discover that provider was getting it wrong all along). Either way, mistakes happen frequently, and they can come with big consequences. Massachusetts Wage Act violations can result in treble damages being awarded to improperly paid employees (“treble” is the legal term for “triple”). In some cases, there may be civil or even criminal enforcement actions. In Conn Kavanaugh’s practice we find that employers want to pay their employees on time and in full, and often think they are doing so. The stiff Wage Act penalties often come as a complete shock (on top of the shock of finding out about the mistakes in the first place). Here is a primer for employers of tipped employees – it is better to be on the lookout up front than to have an unwelcome surprise later.
Why are tipped employees a particular danger zone for employers trying to meet their obligation to pay on time and in full? Under federal and state law, employers may pay certain tipped employees a “service rate” that is lower than the standard minimum hourly wage. The current Massachusetts minimum wage is $15 per hour, and the minimum “service rate” is $6.75 per hour. Some employers choose to pay a little more than this minimum, however. This lower hourly service rate does not actually lower the minimum hourly wage due to tipped employees. It just means that an employer may credit some of the tips earned by employees toward the full minimum wage (this is called a “tip credit”). It is still the employer’s obligation to pay at least the full minimum wage, but it can be made up of the “service rate” and the tips added together. This distinction is often what causes a problem. The following are a few common pitfalls associated with the “service rate.”
Employee Must Actually Earn at Least the Minimum Wage, as Calculated Each Shift
It is an employer’s responsibility to calculate how much tipped employees earn on an hourly basis, when the service rate and tips actually received are added together. If an employee did not in fact earn at least the minimum wage, then the employer is required to make an additional payment to the employee to ensure the minimum wage threshold was met. Critically, since 2019, Massachusetts employers are required to make these calculations on a per-shift basis, independent of any other shifts an employee worked in a week or pay period.
This means a shift that generated excess tips cannot be used to balance out a shift where too few tips were received. Employers who fail to consider such differences between shifts may be inadvertently underpaying employees. For example, let’s say an employer pays an employee a $7 per hour service rate and the employee works two days in one (short!) week, earning service rate payments and actual tips as follows:
Shift one: six hours, $42 in service rate earnings, $30 in tips received
Shift two: six hours, $42 in service rate earnings, $66 in tips received
If the employer looked at this week as a whole and merely multiplied the minimum hourly wage of $15 by the twelve total hours worked, the employer would determine that the employee needed to earn a combined $180 for both shifts. The employer could therefore be under the erroneous impression that no further payments were due to the employee. After all, $42 + $42 + $30 + $66 = $180.
However, the reality is this employee had a good day for tips and a bad day for tips. The employer was required to calculate hourly earnings for each individual shift. Here, for each six-hour shift, the employee should have earned $90 ($15 multiplied by six). During the first shift, the employee only received $72 ($42 at the service rate, plus $30 in tips), so the employer was required to make an additional payment of $18 to the employee, regardless of the “extra” tips the employee earned during the next shift.
The Overtime Rate for Tipped Employees is Not Simply 1.5 Times the Service Rate
Most employers understand that employees who are entitled to overtime pay should be paid “time and a half” for those overtime hours. That is to say, the employee will essentially be paid 1.5 times his or her regular rate of pay. But a tipped employee’s “regular rate” is not the service rate, it is in essence the full minimum wage ($15).* Multiply this by 1.5 for overtime, and you get $22.50. The employer can still take a credit for tips earned – but only after doing that initial overtime rate calculation, or else the employer is essentially taking an extra credit. Here is an example of what that difference can look like.
Let’s say an employer usually pays an employee at a service rate of $10 per hour. That means the employer takes an hourly “tip credit” of $5 toward the Massachusetts minimum wage. So, the employee can be paid at the following rate for overtime hours: $22.50 – $5 tip credit = $17.50 per hour. If the employer was just multiplying $10 by 1.5, the employer would be paying only $15 per hour for overtime hours, which is not correct. Employers also need to be mindful that above all, a tip credit is still just a credit, even for overtime pay: the calculation still needs to account for tips actually received.
* Note: there is a formula to get to this point, but in practice the result is typically the minimum wage. There are exceptions, which is another good reason to consult with an employment attorney.
If it seems like payments to tipped employees are complex, it is because they are. And when it comes to the Wage Act, it does not matter whether an employer thought it was following the law. The burden is on employers to check, double-check, and triple-check that they—or their third-party payroll providers—are in fact paying tipped employees appropriately. If your company’s employment policies, practices, and procedures regarding payment to tipped employees have not been reviewed by an employment attorney recently, it is likely time for a review. It is much less painful to have an attorney to look things over up front than it is to call for help after someone has already brought an allegation of Wage Act violations.
Julie Martin is an attorney with the Boston-based law firm Conn Kavanaugh Rosenthal Peisch & Ford, LLP. She can be reached at jmartin@connkavanaugh.com
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