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Overtime for Tipped Employees

For payrolls that include tipped employees, such as some restaurant employees, who are being paid at an hourly rate less than the applicable minimum wage and who worked overtime hours, an overtime calculation for tipped employees is available.

For tipped employees, an employee's "regular rate of pay" for overtime calculations can't be less than the applicable minimum wage. The overtime for tipped employees (sometimes called "tipped overtime") is the applicable minimum wage multiplied by a rate factor of 1.5 minus the tip credit for overtime purposes.

(Applicable Minimum Wage x 1.5) - (Calculated Regular Rate of Pay - the minimum wage)

Designate one earning code for overtime for tipped employees, and leave the rate factor field blank (not zero) on that overtime code. Often this code is called OTTIPPED, OT Tip Overtime. Detailed pay entry, time import processing, and grid pay entry have settings to opt to calculate the overtime for tipped employees.

• Detailed pay entry:  On the pay entry preferences, enable minimum wage make-up and select the earning for the overtime code.

To apply the overtime calculation for tipped employees, enter rows with hours and the hourly rate, enter other compensation as applicable, enter a row for the designated overtime code for tipped employees, and then save to update the hourly rate for the overtime row.

When the hourly rate is less than the minimum wage, then the hourly rate for the overtime earning is adjusted when the record is saved.

• Time imports:  On the time import screen, choose the minimum wage settings and the earning for tipped overtime when importing time.

When a pay code in the time file is mapped to the earning code selected for overtime for tipped employees, and when the hourly rate is less than the minimum wage, then the hourly rate for the overtime earning is adjusted by the overtime calculation for tipped employees when time is imported.

• Grid Pay Entry:  For grid pay entry, define default rows for the preferred earning code for the overtime for tipped employees. On the settings for posting the grid time, choose the options for minimum wage make-up and choose the earning code that was used to enter hours for the overtime for tipped employees who have hourly rates of less than minimum wage.

When the hourly rate is less than the minimum wage, then the hourly rate for the overtime earning is adjusted by the overtime calculation for tipped employees when the time is posted to pay entry.

Note:  For information about FLSA overtime, please see FLSA Overtime.

Detailed Pay Entry for Minimum Wage Overtime

Here's how to cause the overtime hourly rate calculation for employees who earn minimum wage and earn tips.

1. Enter the employee's usual compensation and rows for time worked.
2. Enter the row for the overtime earning, using the earning code designated for this type of overtime. Enter the number of overtime hours for the row of overtime.
3. Save the record.

Result: If the hourly rate for the overtime row is less than the applicable minimum wage, then the hourly rate for the overtime is calculated based on the calculated standard rate according to the minimum wage minus the tip credit multiplied by the rate factor for the overtime earning.

Example of an Overtime Calculation for a Tipped Employee

For example, a tipped employee works 40 hours of regular time and 20 hours of overtime. The employer pays tipped employees a minimum wage of $6.55 per hour, which is broken down into a cash wage of $2.13 per hour and a tip credit of $4.42 per hour.

To calculate the overtime rate for the tipped employee, the employer:

1. Calculates tipped employee's regular rate of pay ($6.55) multiplied by 1.5.

$6.55 x 1.5 = $9.825

2. ... and then subtracts the hourly tip credit of $4.42.

$9.825- $4.42 = $5.405

This is the calculated overtime rate for the tipped employee.

3. Now, to calculate the actual gross pay including the tips and overtime, that overtime rate is multiplied by the number of overtime hours entered (20 hours),

$5.405 x 20 = $108.10

4. ... and then that sum is added to the employee's 40-hour total ($85.20).

[$108.10 + $85.20 = $193.30.]

Therefore, the gross pay (including tips) is $193.30.