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What Are Tipped Employees?
Working in a job where tips are a significant part of your earnings involves a unique set of pay rules governed by the U.S. Department of Labor (DOL) under the Fair Labor Standards Act (FLSA). These regulations cover topics like minimum wage, how employers can use tips towards that wage (known as a “tip credit”), rules for sharing tips (“tip pooling”), and how pay works if you do both tipped and non-tipped tasks.
Under federal law, you are considered a “tipped employee” if you work in a job where you “customarily and regularly” receive more than $30 per month in tips. This $30 threshold is relatively low, meaning many part-time service workers qualify. Some states set different thresholds – for example, Pennsylvania uses $135 per month, while Massachusetts and Texas use $20 per month.
A tip (or gratuity) is a sum presented by a customer as a gift in recognition of service performed. It must be a voluntary payment, with the customer having the unrestricted right to determine the amount and who receives it. Crucially, tips are legally considered the property of the employee(s) receiving them.
Key Terms You Should Know
Mandatory Service Charges: These are different from tips. Charges automatically added to a bill (e.g., an 18% charge for a large party) are not considered tips under the FLSA. This money initially belongs to the employer. If the employer distributes part or all of a service charge to employees, that money is treated as wages, not tips. Service charges cannot be counted towards a tip credit, and they must be included when calculating an employee’s regular rate of pay for overtime purposes.
Federal Minimum Wage: The current federal minimum wage is $7.25 per hour. This is the minimum hourly rate that all covered, non-exempt employees, including tipped employees, must ultimately receive for all hours worked.
Direct Cash Wage (or Required Cash Wage): This is the minimum hourly amount an employer must pay directly to a tipped employee, before accounting for tips. Under federal law, this amount must be at least $2.13 per hour.
Tip Credit: This is the maximum amount per hour that an employer is allowed to count from an employee’s tips towards meeting the full federal minimum wage obligation of $7.25 per hour. The maximum federal tip credit is calculated by subtracting the minimum required direct cash wage from the full federal minimum wage: $7.25 – $2.13 = $5.12 per hour.
The system is designed so that the combination of the employer’s direct cash wage payment and the tips received by the employee ensures the employee earns at least the full minimum wage.
How the Tip Credit Works
The FLSA allows employers to pay a lower direct cash wage (at least $2.13 per hour) than the full federal minimum wage ($7.25 per hour) if they claim a “tip credit.” Here’s how it works:
The Basic Calculation
The fundamental principle is that an employee’s Direct Cash Wage (which must be at least $2.13/hour) plus the Tips they actually receive must equal or exceed the Federal Minimum Wage ($7.25/hour) for all hours worked in a workweek.
Example: If an employee works 40 hours in a week, is paid a direct cash wage of $2.13/hour, and receives $250 in tips that week ($6.25/hour average), their total hourly earnings are $2.13 + $6.25 = $8.38/hour. Since $8.38 is greater than $7.25, the minimum wage requirement is met. The employer could claim a tip credit of up to $5.12 per hour for that workweek.
Employer Make-Up Obligation
This is a crucial protection for employees. If the combination of the direct cash wage and the tips received does not average out to at least $7.25 per hour over the workweek, the employer is legally required to pay the difference. This ensures the employee always receives at least the federal minimum wage, regardless of how slow tips might be during a particular week. This make-up payment must be made on the regular payday for the pay period.
Tip Credit Cannot Exceed Tips Received
An employer can claim a tip credit up to the maximum allowed ($5.12 per hour under federal law), but the credit claimed for the workweek cannot be more than the amount of tips the employee actually received during that workweek. The calculation is done over the workweek, allowing earnings from busy shifts to potentially offset slower shifts within the same week.
Employer Obligations When Claiming a Tip Credit
Taking a tip credit is not automatic; employers must meet several specific requirements under the FLSA:
Pay Minimum Direct Cash Wage
The employer must pay a direct cash wage of at least $2.13 per hour.
Ensure Total Pay Meets Minimum Wage
The employer must monitor earnings and make up any shortfall if the direct cash wage plus actual tips received does not average at least $7.25 per hour for the workweek.
Employee Notification
Before an employer can claim a tip credit, they must inform the tipped employee(s) about the tip credit rules. This notice must include:
- The amount of the direct cash wage the employer is paying (must be at least $2.13/hour)
- The additional amount the employer is claiming as a tip credit (cannot exceed the maximum allowed, currently $5.12/hour federally)
- Confirmation that the tip credit claimed cannot exceed the amount of tips the employee actually receives
- A statement that all tips received by the employee must be retained by the employee, except where the employee participates in a valid tip pooling arrangement
- Notice that the tip credit provisions will not apply unless the employee has been informed of these specific points
This notification can be given orally or in writing, although providing it in writing is a best practice. Failure to provide this required notice means the employer cannot legally take the tip credit and must pay the employee the full minimum wage directly.
Prohibition on Keeping Tips
A cornerstone of current tip law is that employers, including any managers or supervisors, are strictly prohibited from keeping any portion of employees’ tips, for any reason. This applies regardless of whether the employer takes a tip credit or pays the full minimum wage directly.
Credit Card Fees
When customers leave tips via credit card, employers must pay the full tip amount to the employee. Under federal law, an employer can deduct the actual transaction cost charged by the credit card company for that tip transaction, but only if this deduction doesn’t cause the employee’s total wage to fall below the required minimum wage. Some states, like California and Minnesota (as of August 2024), prohibit any deduction of credit card fees from employee tips.
Illegal Deductions
Employers cannot make deductions from wages for things like customer walkouts, breakage, or cash register shortages if such deductions would reduce the tipped employee’s earnings below the minimum wage. These are considered standard costs of doing business that the employer must bear.
Navigating “Dual Jobs”: Tipped and Non-Tipped Work
A common scenario in industries like hospitality is an employee performing tasks related to their tipped job (like a server prepping salads) and sometimes performing entirely separate, non-tipped duties for the same employer (like a server who also covers shifts as a host).
Following a significant court decision in 2024 (Restaurant Law Center v. U.S. Department of Labor) and the DOL’s subsequent withdrawal of its 2021 regulations, the rule governing “dual jobs” reverted to the original 1967 DOL regulation found in 29 CFR § 531.56(e).
What the Rule Says
The 1967 regulation states that if an employee works in two separate and distinct jobs for the same employer—one tipped (like a waiter) and one non-tipped (like a maintenance person)—the employer can only claim a tip credit for the hours the employee spends working in the tipped occupation. No tip credit can be taken for hours worked in the non-tipped occupation.
Related Duties vs. Dual Jobs
The regulation distinguishes this “dual jobs” situation from that of a tipped employee performing related duties that are part of their tipped job but don’t directly generate tips themselves. Examples include a waitress cleaning and setting tables, making coffee, or toasting bread. The employer can still take the tip credit for time spent on these related, non-tip-producing duties when they are performed as part of the tipped occupation.
The primary focus is on whether the employee is performing work within their tipped occupation (including related side work) versus working in a different, non-tipped occupation. This simplifies compliance compared to the administrative burden of the previously applicable “80/20/30 rule,” which had set specific time limits on non-tip-producing work.
Tip Pooling Arrangements: Sharing Tips Legally
Tip pooling (or tip sharing) involves collecting tips earned by multiple employees and redistributing them among a designated group. Federal law permits employers to require employees to participate in tip pools, but only if specific rules are followed. State laws can impose additional restrictions.
The federal rules depend heavily on whether the employer takes a tip credit:
Rules When Employer Takes a Tip Credit (Traditional Pool)
If an employer uses the tip credit (paying a direct wage below the full minimum wage), a mandatory tip pool must be limited only to employees who “customarily and regularly receive tips.” This typically includes positions like servers, bussers, and bartenders. “Back-of-house” staff like cooks, dishwashers, and janitors cannot be part of such a mandatory pool. Additionally:
- The employer must notify participating employees of any required contribution amount
- The employer can only apply the tip credit against the minimum wage based on the amount of tips the employee ultimately receives after the pool distribution
- Employers, managers, and supervisors are prohibited from receiving any money from this type of tip pool
Rules When Employer Pays Full Minimum Wage (No Tip Credit Taken)
If an employer chooses not to take a tip credit and pays all employees at least the full federal minimum wage directly, they have more flexibility. They may implement a mandatory tip pool that includes employees who do not customarily receive tips, such as cooks and dishwashers. This allows for sharing tips between front-of-house and back-of-house staff.
However, even in this type of pool, employers, managers, and supervisors are still barred from keeping or receiving any portion of the tips from the pool.
Managers and Supervisors
The FLSA is unequivocal: employers, managers, and supervisors cannot keep employee tips, including through participation in any tip pool. Recent DOL guidance has clarified:
- A manager or supervisor cannot receive tips from a pool even if they perform tipped work during certain shifts
- A tip pool consisting only of managers/supervisors is not permissible if it involves sharing tips derived from other employees’ work
- Managers and supervisors may keep tips given directly by a customer for service that the manager or supervisor personally and solely provided
- Managers and supervisors may contribute tips they earned directly into an eligible employee tip pool, but they cannot receive any distribution from that pool
Distribution
When an employer collects tips to administer a pool, they must fully distribute all collected tips by the regular payday for the workweek in which the tips were earned. If delays in calculation occur, tips must be distributed as soon as practicable after the payday.
State vs. Federal Law: Which Rules Apply?
Navigating tipped employee wage laws requires understanding that federal law sets a baseline, but state and sometimes local laws can provide additional protections or requirements.
The Governing Principle
Employers must comply with all applicable federal, state, and local laws. When these laws differ, the employer must adhere to the standard that is most favorable or provides greater protection to the employee. For example, if a state requires a higher minimum cash wage for tipped employees than the federal $2.13, the employer must pay the higher state rate.
Common Areas of Variation
State laws frequently differ from the FLSA on several key points:
- Minimum Cash Wage: Many states mandate a higher direct hourly wage for tipped employees than the federal $2.13.
- Tip Credit Allowance: Some states allow a smaller maximum tip credit than the federal $5.12. Crucially, a number of states completely prohibit employers from taking any tip credit. In these states, employers must pay tipped employees the full state minimum wage directly. These states currently include Alaska, California, Minnesota, Montana, Nevada, Oregon, and Washington.
- Tip Pooling Rules: State laws may restrict or modify tip pooling practices allowed under federal law. For example, Minnesota generally prohibits mandatory tip pooling, while California permits mandatory pooling but explicitly prohibits managers, supervisors, or owners from sharing in the pool.
- Credit Card Fee Deductions: While federal law allows deduction of the actual fee under certain conditions, some states prohibit employers from deducting any credit card processing fees from employee tips.
This wide variation creates a complex compliance environment, especially for businesses operating in multiple states. It also means that a tipped employee’s pay structure and rights can differ significantly based simply on their work location.
Employer Recordkeeping for Tipped Employees
Accurate recordkeeping is crucial for employers to demonstrate compliance with FLSA requirements for tipped employees. For tipped employees, especially when a tip credit is claimed, the DOL requires specific records under 29 CFR § 516.28:
- Identification of Tipped Employees: Payroll records must clearly indicate which employees are paid using the tip credit system
- Reported Tips: Employers must keep records of the weekly or monthly amount of tips each employee reports receiving
- Tip Credit Amount: The record must show the hourly tip credit amount the employer is claiming for each employee
- Hours in Tipped vs. Non-Tipped Occupations: Employers must record the hours worked each workday by the employee specifically in the tipped occupation
Even if an employer pays the full minimum wage and does not take a tip credit, but still collects tips to operate a mandatory tip pool, they must maintain records identifying which employees receive tips and the amounts reported by the employees.
States may impose additional recordkeeping requirements. Proper recordkeeping serves as the employer’s primary evidence to prove they have correctly paid minimum wage and overtime, properly applied any tip credit, complied with dual jobs regulations, and legally operated any tip pools.
Official Department of Labor Resources
For the most accurate and up-to-date information, consult the official resources provided by the U.S. Department of Labor’s Wage and Hour Division (WHD):
- WHD Website
- WHD Tips Page (A central hub for regulations, fact sheets, and updates on tipped employment)
- Fact Sheet #15: Tipped Employees Under the Fair Labor Standards Act (FLSA) (Comprehensive overview of federal rules)
- Regulations – 29 CFR Part 531, Subpart D – Tipped Employees (The official text of the regulations)
- Regulations – 29 CFR § 516.28 – Recordkeeping for Tipped Employees (Specific recordkeeping requirements)
- WHD Toll-Free Helpline: 1-866-4USWAGE (1-866-487-9243) (Available for questions 8 a.m. to 5 p.m. in your time zone)
Using these primary sources ensures access to the definitive rules and guidance directly from the enforcing agency.
Our articles make government information more accessible. Please consult a qualified professional for financial, legal, or health advice specific to your circumstances.
