Concepts > Minimum Wage and Tips

How Compeat Calculates Minimum Wage

By law, employees must be paid a minimum hourly wage for every 7-day workweek. If an employee’s adjusted hourly rate ((reg rate * shift hours) + service charges) / shift hours) is less than the minimum wage, the difference must be made up in tips. The formula used to determine this is (assuming minimum wage is $5.85/hr):

((Regular Hourly Rate * Shift Hours) + Service Charges + Total Tips Received) / Shift Hours = $5.85

Consider as an example a server who gets paid a base hourly rate (a cash wage) of $2.13, has $25 in service charges and works 40 hours in a week. In order to make an effective rate of $5.85 an hour, that server must receive at least $123.80 in tips for the week. Using the formula above, this comes out to:

(($2.13 x 40) + $25 + $123.80) / 40 = $5.85 an hour

If a tipped employee does not earn enough tips to bring his rate up to the minimum wage, Workforce will automatically adjust his hourly rate. Using the example above again, suppose the server only made $100 in tips that week. That would mean the effective hourly rate was:

(($2.13 x 40) + $25 + $100) / 40 = $5.26 an hour

Since $5.26 is below the minimum wage, Workforce will have to adjust the hourly rate for that week. In order to determine the rate needed to bring an employee up to minimum wage, Workforce uses this formula:

((Minimum Wage x Hours Worked) – Service Charges - Total Tips Received) / Hours Worked = New Rate

(($5.85 x 40) – $25 - $100) / 40 = $2.73 an hour

With this new rate, the employee will earn (($2.73 x 40) + $25 + $100) / 40 = $5.85 an hour.

It is important to note that this calculation is made on a weekly basis. If you pay your hourly employees bi-weekly, it is entirely possible that a server may need a subminimum wage adjustment for the first week but not for the second. This also means you should be careful to enter the tips and service charges your employees received in the week that they earn them. If you have bi-weekly pay periods and you enter all of the tips on the last day of the period, Workforce will incorrectly assume that they received no tips in the first week. This would cause all of your tipped employees to have their hourly rate adjusted to the entity's minimum wage for the first week.

Workforce determines the weekly periods by looking at the First Day of Week established in labor definitions for the entity and counts in 7-day increments.

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