	The Fair Labor Standards Act (FLSA) and the Minimum Wage

The FLSA, enacted in 1938 (P.L. 75-718), is the federal legislation that establishes the general minimum wage that must be paid to all covered workers. History and Mechanics of Tip Credit Provisions

Congress amended the FLSA in 1966 to add a "tip credit" provision to the minimum wage provisions. That is, the "credit" is the amount from employee tips that an employer may count against its liability for the required payment of the full federal minimum wage. Under the current federal minimum wage and the current required minimum employer cash wage, the maximum tip credit is $5.12 per hour (i.e., $7.25 minus $2.13). Thus, all workers covered under the tip credit provision of the FLSA are guaranteed the federal minimum wage. Prior to 1996, the amounts for the minimum employer cash wage and tip credit were set as a percentage of the minimum wage and ranged from 40% to 55% of the minimum wage. That is, during the 30 year period of 1966-1996, employers of tipped employees could take a credit from tip earnings of between 40% and 55% of the federal minimum wage against their liability to provide the minimum wage to their employees. The 1996 FLSA amendments set the employer's statutory minimum cash wage at $2.13 per hour (rather than a percentage of the minimum wage) and the size of the tip credit became dependent on the value of the minimum wage (i.e., the tip credit after 1996 equals the minimum wage minus $2.13). If the tip credit continues to be set by reference to a fixed dollar amount, rather than as a percentage of the minimum wage rate, the tip credit percentage of the guaranteed minimum wage will continue to increase and the employer cash wage percentage will continue to decrease if and when the federal minimum wage increases. With the minimum wage increase in 2007, the tip credit began to increase to its current level of 71% of the minimum wage. Under the current federal minimum wage of $7.25 per hour, employers are required to pay a minimum cash wage of $2.13 per hour (29% of the federal minimum wage) and may take up to $5.12 per hour (71% of the federal minimum wage) as a credit against their liability to provide the full minimum wage of $7.25 per hour. Proposed Changes to Tip Credit Provisions

Legislation was introduced in the 113 th Congress that would have amended Section 203(m)(1) of the FLSA to alter the payment structure for tipped employees. Specifically, the most common proposed changes included in the bills introduced in the 113 th Congress would have increased the required employer contribution from the current level of $2.13 per hour to 70% of the prevailing federal minimum wage rate. Changing the tip credit provisions to set the required employer minimum cash wage from a fixed dollar amount ($2.13) to a percentage of the minimum wage (70%) has implications for tipped employees, their employers, and the total cost of the increase:
Under the proposed changes, the tip credit would remain a constant share, 30%, of the federal minimum wage. Interaction with State Minimum Wage Provisions

Because several states have minimum wage rates that are different (mostly higher) than the federal minimum wage and different tip credit provisions, the impact of increasing the federal employer minimum cash wage would vary across states. 39 jurisdictions allow a tip credit: 26 states and the District of Columbia require a minimum employer cash wage greater than the federal rate of $2.13 per hour.
The Fair Labor Standards Act (FLSA), enacted in 1938 (P.L. 75-718), is the federal legislation that establishes the general minimum wage that must be paid to all covered workers. In 1966, Congress amended the FLSA to add a "tip credit" provision to the minimum wage provisions. These amendments, which apply to "tipped workers," do not change the guaranteed minimum wage of $7.25 per hour but they allow a combination of earnings from employer cash wages and employee tips to equal the federal minimum wage (currently $7.25 per hour). That is, the "credit" is the amount from employee tips that an employer may count against his or her liability for the required payment of the full federal minimum wage. Under the current federal minimum wage and the current required minimum employer cash wage, the maximum tip credit is $5.12 per hour (i.e., $7.25 minus $2.13). Thus, all workers covered under the tip credit provision of the FLSA are guaranteed the federal minimum wage but tipped workers receive some of this income from employers and some from tips.
From the introduction of the tip credit provisions in 1966 through 1996, the amounts for the minimum employer cash wage and tip credit were set as a percentage of the minimum wage, ranging from 40% to 60%. That is, during that 40-year period, employers of tipped employees could take a credit from tip earnings of between 40% and 60% of the federal minimum wage against their liability to provide the minimum wage to their employees.
The 1996 FLSA amendments changed the tip credit provisions to set the employer's statutory minimum cash wage obligation to a dollar amount ($2.13 per hour), rather than a percentage of the minimum wage. The maximum tip credit thereafter became the difference between $2.13 and the federal minimum wage. If the tip credit continues to be set by reference to a fixed dollar amount, rather than as a percentage of the minimum wage rate, the tip credit percentage of the guaranteed minimum wage will continue to increase and the employer cash wage percentage will continue to decrease if and when the federal minimum wage increases. With the minimum wage increase in 2007, the tip credit increased to its current level of 71%. Thus, under the current federal minimum wage of $7.25 per hour employers are required to pay a minimum cash wage of $2.13 per hour (29% of the federal minimum wage) and may take up to $5.12 per hour (71% of the federal minimum wage) as a credit against their liability to provide the full minimum wage of $7.25 per hour.
In the 113th Congress, legislation was introduced that would have amended the FLSA to alter the payment structure for tipped employees. Specifically, the most common proposed changes in the different bills would have increased the required employer contribution from the current level of $2.13 per hour to 70% of the prevailing federal minimum wage rate and would thus reduce the tip credit to 30% of the federal minimum wage.
Several states have minimum wage rates that are different (mostly higher) than the federal minimum wage and different tip credit provisions. Of the 50 states and Washington DC, seven do not allow a tip credit, while the other 44 have a range of tip credit provisions, most of which require a minimum employer cash wage higher than the federal rate of $2.13 per hour. In cases in which states enact more protective minimum wage laws (i.e., higher minimum wage, lower tip credit), the employee is entitled to the provisions of state law.