Calculating overtime pay for tipped employees working in multiple positions at different rates in a single workweek can be confusing. So confusing, in fact, that we discovered that even the District of Columbia’s Department of Employment Services (“DOES”) was getting it wrong in guidance published on its website. So, if you are a Washington, D.C. restaurant or other business owner employing tipped employees working at two different rates in a single work week, and you were calculating overtime based on the DOES guidance, you probably have been paying your employees more overtime pay than the law requires.
Before reviewing what DOES did wrong, let’s briefly review the key principles to keep in mind when calculating overtime pay for tipped and non-tipped employees in Washington, D.C.
Rate of pay: As of July 1, 2019, the minimum wage rate in Washington, D.C. is $14.00 per hour, and the absolute minimum rate an employer may pay a tipped employee is $4.45 per hour. That is, employers can pay a tipped employee as low as $4.45 per hour for the employee’s work in his or her tipped position, so long as his or her tips are at least enough to make up the difference between the $14 “full minimum wage” and the $4.45 per hour “tipped minimum wage.”
Overtime rate of pay: The overtime rate is “time and a half”: (i) the employee’s regular rate of pay plus (ii) the overtime “premium” equal to 50% of the employee’s regular rate. When paying the overtime premium to a tipped worker, however, employers must use 50% of the full minimum wage of $14.00 per hour, not the $4.45 tipped minimum wage. So, time and a half for the typical tipped employee would be $11.45/hour ($4.45 + $7.00) for each overtime hour.
The DOES gives the following illustration: A tipped employee earning $4.45 per hour, works 42 hours in one week. To calculate the total pay, you would multiple $4.45 by 40 hours and $11.45 by two hours, and add up the two totals to obtain the total wages due of $200.90. Easy! But what if the employee works, say, 20 hours in a tipped position, and 25 hours in a non-tipped position? How do you calculate the overtime? Or, if all 45 hours are in non-tipped positions but at different regular rates of pay?
Employees that work in two positions with different rates of pay in one week: The key principle to keep in mind is that the overtime premium to be paid to the employee for the week is based on the weighted average of the employee’s regular rates of pay for that week. The weighting is done based on the hours worked at each rate. Remember that this calculation will need to be done whether the employee works in two non-tipped positions with two different regular rates of pay or in one tipped position and one non-tipped position.
Ex 1) Employee A works 25 hours as a cook at $20.00 per hour, and 20 hours as an administrative assistant at $15.00 per hour. Both of these are non-tipped positions. To calculate their overtime pay you would determine the weighted average of their regular rates of pay. This involves the following: ($20.00 * 25) + ($15.00 * 20) = $800.00. Then divide $800.00 by the total number of hours worked to arrive at the weighted average regular rate of $17.78. The overtime premium is half of the weighted average, i.e. $8.89.
Ex 2) Employee B works 20 hours as a cook at $20.00 per hour and 30 hours as a server at $4.45 per hour (plus tips). To calculate their overtime pay you would again determine the weighted average of the two rates. However, when dealing with tipped positions, you must use the full minimum wage ($14.00) as the regular rate, not $4.45.
Here is a step by step illustration:
Step 1: Determine the total wages at the regular rate of pay: 20 hours * $20.00 = $400 and 30 hours * $4.45 = $133.50. The total pay at the regular rates = $533.50.
Step 2: Determine the weighted average of the regular rate of pay, using the full minimum wage for the hours worked in the tipped position:
A. Multiple the full minimum wage ($14.00) by the 30 hours worked in the tipped position: 30 * $14.00 = $420.
B. Add $420 to $400, and divide by the total number of hours worked: $820/50 equals $16.40. Since all straight-time hours have been paid, the additional half-time hourly rate required to be paid is $8.20 (1/2 of $16.40) multiplied by the 10 overtime hours worked for a total overtime payment of $82.00.
Step 3: Determine the total to be paid to the employee: Here is where the prior DOES guidance was incorrect. The guidance advised that to arrive at the total wages for the week, the employer would add $400.00 + $420.00 + $82.00 for a total payment of $902.00. This is incorrect and results in an overpayment to the employee. The correct calculation would be $400 + $133.50 + $82.00 for a total payment of $615.50, a significantly lower number.
Remember too that tipped employees must receive enough in tip credits to cover the difference between their base minimum wage (currently $4.45) and the $14.00 full minimum wage for all hours worked in their tipped position(s).
DOES Guidance on Computing Overtime Pay for Tipped Employees: For those employers that have been following the incorrect DOES guidance to calculate total wages for employees working in tipped and non-tipped positions in the same week, you may have been overpaying your staff. While reviewing the previously posted guidance we noticed that the total wage payment calculation was amiss for employees working in tipped and non-tipped positions, resulting in unnecessarily inflated total payments to some tipped employees.
After contacting the Office of Wage and Hour Compliance to seek clarification, we were advised that the example provided in the guidance was in fact incorrect and new guidance would be issued. The corrected guidance can be found here. We would recommend reviewing the formulas being used in your establishment to ensure that they are accurate. Mintz has put together a spreadsheet with the correct formulas embedded in the document to assist clients in the hospitality and service industries.
For additional information on this, please contact David Barmak or Jennifer Budoff in our Employment Labor and Benefits Department in Mintz’s D.C. office. For additional information on this topic you can also review our prior blog post discussing D.C.’s new requirements for employers of tipped workers.