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Withholding of Tip Money

I have a terminated employee that signed an promissory note with our salon for education fees that we loaned her. Her last pay check had tips on it that she received from customers. Can we withhold the tips for money owed us?

The federal Fair Labor Standards Act (FLSA) establishes minimum wage, overtime pay, recordkeeping, and youth employment standards affecting employees in the private sector and in Federal, State, and local governments. Any company/organization with annual dollar volume of sales or receipts of $500,000 or more is considered a covered enterprise under the FLSA.

Under the FLSA, employees are either non-exempt or exempt. Non-exempt employees must be paid for all hours worked and are subject to overtime and minimum wage requirements prescribed by the FLSA. Conversely, exempt employees receive a fixed predetermined salary and are excluded from overtime pay provisions. An employee who receives tips is non-exempt but we’ll touch on both classifications.

There are few permissible deductions from an exempt employee’s salary, including the employee’s final paycheck. Reducing an exempt employee’s salary to recoup a loan is not one of them. Thus, doing so violates the salary basis test under the FLSA. Not only would the exempt status of the employee in question be at risk, but so would the exempt status of all similarly situated employees.

Employers are permitted to make certain deductions from non-exempt employees’ wages including deductions for recouping a loan.

Generally, most deductions may not reduce an employee’s rate of pay below the minimum wage. However, deductions referred to as voluntary wage assignments are permissible even when they reduce an employee’s rate of pay below minimum wage. Voluntary wage assignments are generally for something that benefits the employee, such as a loan for educational expenses.

It’s important that the employer has written authorization from the employee to make deductions for the pay advance. A promissory note is acceptable but it should clearly state that any money owed at the time of separation will be deducted from the final paycheck.

Keep in mind; though the deduction is permissible under the federal FLSA, some states have adopted their own wage and hour laws under which such deductions may not be allowed. Thus, it’s important to know applicable state legislation. Feel free to post a comment on this question with the state listed and we can research applicable laws in your state.

This entry was posted on Sunday, September 27th, 2015 at 9:17 pm and is filed under
Compensation, Labor Laws.
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2 Responses to “Withholding of Tip Money”

  1. Leah F Says:

    Thank you for your advice. But I need to know what applicable laws for,the State of Texas applies .

    Thank You,
    Leah F.

  2. hrlady Says:

    Hi Leah,
    Employers in Texas are subject to the Texas Payday Law. Basically, withholding an employee’s wages from the last paycheck is only permissible if the employee authorizes the deduction in writing. The law doesn’t differentiate hourly wages versus tips so it’s assumed the same guidelines apply to both. So, even though you have a promissory note, the note must specifically authorize you to deduct the due amount from the employee’s paycheck. Otherwise, the employee must be paid her full wages owed to her. Furthermore, under the Texas Payday law, you must pay the full owed amount to a terminated employee no later than the sixth day after the discharge. An employee who resigns must be paid no later than the employer’s next regularly scheduled payday.HTH.

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