Tipped Employees Under the FLSA

The Fair Labor Standards Act (FLSA) mandates employees a minimum hourly wage of $7.25. But, the federal employment law allows employers to pay some workers less than the federal minimum wage. Employees in the food and beverage industries often get gratuities from customers on top of cash wages paid by the employer. Under the tip credit provisions found in the FLSA, employers can pay tipped employees a smaller hourly wage.

Tipped workers usually get more than $30 in tips in a month. Examples of tipped workers include bartenders, bellhops, and servers. Federal law allows employers to meet their minimum wage obligation by paying tipped workers $2.13 an hour and claiming a credit (called a "tip credit") for the tips given to employees to make up the balance of the full minimum wage requirement. A tip credit is a way to include gratuities in the minimum wage calculation.

If an employer claims the tip credit, the employer must make sure the employee gets enough customer gratuities and cash wages in a workweek to equal the minimum wage and overtime compensation required under federal law.

Tips are the property of the tipped employee. The employer cannot take all or part of the tip. The law allows tip pooling, the sharing of tips.

State law

Employers should also consult state laws and regulations related to tip credits. Some jurisdictions don't allow employers to take a tip credit. Also, many state minimum wage requirements exceed the federal minimum wage obligation.

For example, the FLSA permits a $2.13 per hour tip credit toward the federal minimum hourly wage of $7.25. But, the minimum wage in Ohio for 2021 was $8.80. The cash wage was $4.40. As a result, the tip credit in Ohio for 2021 was $4.40. Employers in Ohio must compensate a tipped worker with a minimum of 50% of the applicable yearly minimum wage.

Tip Credit

Tipped employees must receive an employer-paid wage of at least $2.13 per hour, more if the amount of tips received does not equal $5.12 an hour (based on the current minimum wage of $7.25). This means employers can claim a "tip credit" of up to $5.12 against the federal minimum wage.

Non-tipped workers don't qualify for a tip credit. Employers must pay non-tipped employees at least minimum wage for all hours worked.

Tip Credit Notice to Employees

To take advantage of the tip credit, employers must provide tipped employees with the following information:

1. Amount of wage the employer will pay
2. The amount the employer will credit against tips
3. The tip credit will not exceed the value of tips received
4. All tips received belong to the employee, except when collected for a valid tip pool

Employers may provide notice of the above items verbally or in writing. Employers who fail to do so must pay tipped employees the federal minimum wage and allow them to keep all tips received. If the combination of employer-paid wages and tips does not add up to the minimum wage, the employer must make up this difference.

Tip Pooling

The FLSA allows tip pooling arrangements among service employees who typically receive tips. For example, servers may have to pool their tips with bartenders and bussers for equal disbursement at the end of a shift. Employers may not compel tipped employees to pool tips with those who perform non-tipped work, such as cooks, dishwashers, and janitors.

According to federal rules, there is no maximum amount or percentage of tips for a valid mandatory tip pool. But, employers must notify tipped employees of any tip pool contribution requirements. Employers are also banned from retaining tips for any other purpose.

Tipped Employees With Dual Jobs

Tipped employees sometimes perform non-tipped duties for part of their time, often within the same shift. For example, servers may also spend some time making coffee, folding napkins, and cleaning tables. Tip credits only apply to hours of work that produce tips or directly support tip-producing work as long as the worker doesn't do the directly supporting work for a substantial amount of time.

In October 2021, the U.S. Department of Labor updated its tip regulations. It clarified that an employer can claim a tip credit solely for the hours an employee spends performing tip-generating work or tasks directly related to such work. In such cases, the employer considers the employee working in a tipped occupation.

But, employers may not use the tip credit when the tipped employee spends more than 20% of their time performing duties that do not generate tips.

Service Charges vs. Tips

Mandatory service charges are not considered tips, according to the FLSA. That means employers cannot count a mandatory 15% service charge paid to wait staff, such as tips received for use as a tip credit.

Employers may count the service charge as part of the employee's minimum wage and overtime requirements. The FLSA considers employees who receive tips and a mandatory service charge as tipped employees.

Tips and Credit Card Fees

Customers who pay by credit card typically write in their tip. But, since employers pay a roughly 3% fee for each credit card transaction, they can recoup the portion of this fee applicable to an employee's tip. For example, assuming a 3% fee, the FLSA allows an employer to pay the tipped employee 97 cents of a $1 tip if charged on a credit card.

Employees can get payment of tips charged on credit cards on or before the regular payday, and the employer cannot withhold the tips while the employer waits for reimbursement.

Tip Credit Enforcement

Employers who keep employee tips are subject to fines regardless of whether the violation is accidental or a first-time transgression. Employers could face an assessment of up to $1,100 for each violation. DOL beefed up penalties in such situations with a final rule that went into effect in 2021.

The U.S. Department of Labor's Wage and Hour Division enforces federal wage laws and wage violations, such as the FLSA's tip credit provisions.

Questions About Tipped Employees Under the FLSA? Ask a Lawyer

Legal issues surrounding employee wages, including tips and overtime pay, frequently arise in the workplace. An employment attorney can help. If you or someone you know has an employment-related issue, speak with a local employment lawyer to help you understand the law and your options.