Prevailing Wage, Tip Credits and Misclassification

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The Fair Labor Standards Act (FLSA) requires all employers to pay a minimum wage of at least $7.25 per hour, regardless of the type of work they do or whether they employ tipped employees. However, some exceptions apply to certain industries and occupations as well as some exemptions from these rules for those who qualify under limited circumstances. Understanding prevailing wage rates, tip credits, and misclassification – three important concepts in the world of labor law with implications for many workers throughout the country, will be key for allowing smooth progress in the labor industry. The labor industry accounts for a large part of the U.S economy

Prevailing Wage

Prevailing wage, as defined by the FLSA, is a minimum level of pay for work on public works projects that must be paid to workers based on their classification under prevailing rate systems or collective bargaining agreements. Prevailing wage requirements are set by the U.S Department of Labor which requires that contractors and subcontractors pay their laborers, workers, or mechanics employed on any public works project not less than the locally determined prevailing rates of wages for corresponding classes of laborers, workers, or mechanics in the area where such employees are performing under a contract covered by this chapter.

A contractor or an employer who pays his/her employee(s) at least equal to the local prevailing rate may be eligible for exemption from paying these additional costs if they can show evidence. However, it would create significant hardship if there are no payments evidence. State Departments may have different guidelines as well as exemptions depending upon the type of work being performed and other factors that affect costs of living.

In addition to wage requirements, workers employed on federal projects over $100,000 must be paid at least the basic hourly rate for all hours worked. Apart from that, overtime should be paid at a rate not less than one-and-a-half times their regular rates of pay after 40 hours in a workweek, unless they are otherwise exempt from FLSA provisions. Prevailing wages can also impact compliance with Davis Bacon Act obligations. This is because prevailing rates may include fringe benefits that could increase overall costs under this act.

Tip Credits

Tip credits permit an employer to take credit toward its minimum wage obligation for tips received by its employees as part of those employees’ regular duties. If an employee’s tips combined with the minimum employer’s direct wages of at least do not equal the federal minimum hourly wage, the employer must make up the difference. However, there are strict requirements for tip credits and it is important to understand them before applying one.

Tip Credits Regulations

Employers must inform employees of the tip credit allowance before crediting tips, orally or in writing.

The employee’s regular rate of pay cannot be less than $12 an hour after applying for any tip credits. If it is, employers would have to make up the difference so that the total compensation equals at least the federal minimum wage for all hours worked. This can become complicated when factoring in overtime hours and other wages earned by an employee during a workweek.

The tip credit can only be applied to the hourly wage of an employee who customarily and regularly receives tips, such as waiters.

To claim a tip credit, employers must inform tipped employees how it calculated their wages after applying for any tip credits.


The term misclassification refers to an employer treating his/her employee as something other than what he/she is (such as an independent contractor) concerning regulatory requirements such as tax withholding and social security contributions. There are many reasons why employers may engage in this activity but it is important to note that it is illegal and punishable by law.

Misclassification is an important issue in the labor industry because it reduces government tax revenue and leaves employees without proper access to benefits. Misclassification also creates a competitive disadvantage for employers who are following all laws, as they have more difficulty hiring quality workers than those that do not follow them (which causes businesses like construction companies to be especially targeted). Lastly, misclassified individuals cannot seek legal recourse if their employer violates labor standards because there isn’t any protection under the law. This can cause low-income earners to lose significant amounts of money due to substandard working conditions or other issues which might arise.

Prevailing wage rates are required by law for public works projects in many states including California. Additionally, tip credits may be taken toward an employer’s minimum wage obligation if the employees regularly receive tips as part of their duties. Finally, misclassifying workers is considered a violation of labor laws which can result in serious penalties for employers.

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