Tipped Employee Wages: The Tip Credit, Tip Pools, and Stolen Tips

How the Federal Tip Credit Works

Under the Fair Labor Standards Act, an employer may count a limited amount of an employee's tips toward the minimum wage. The federal minimum wage is $7.25 an hour and the minimum cash wage for a tipped employee is $2.13, so the most an employer can claim as a tip credit is $5.12 an hour. That credit is allowed only for a tipped employee, meaning someone who customarily and regularly receives more than $30 a month in tips.

• Tips must cover the gap

  If the cash wage plus the tips an employee actually received in a workweek do not equal $7.25 for each hour worked, the employer must pay the difference.

• The employee must be told

  The employer must tell the employee that it is using the tip credit before it does so. If the employer skips this step, it may owe the full minimum cash wage for those hours.

• Overtime is figured on the full wage

  Overtime for a tipped employee is calculated from the full minimum wage, not from the $2.13 cash wage, and the employer can still take the tip credit against the overtime rate.

• Tips belong to the employee

  The employee keeps all tips, apart from a valid tip pool. The credit is only a way of counting tips toward the wage, and it does not give the employer ownership of them.

Who Is Allowed to Keep or Share Tips

Since 2018, the law has said that an employer, manager, or supervisor may not keep any part of the tips employees receive. This rule applies whether or not the employer takes a tip credit. A mandatory tip pool is allowed only when the employer pays the full minimum cash wage, or when the pool is limited to employees who customarily and regularly receive tips, such as servers, bartenders, and bussers. Managers and supervisors cannot take a share.

Common Ways Tipped Workers Are Underpaid

• Tips kept by the business

  A manager pockets part of a shared tip jar, or the owner keeps a cut of tips left on cards.

• Card fees taken from tips

  An employer may pass along the actual processing fee on a credit card tip, but it cannot take more than that fee out of the tip.

• Deductions that cut into the minimum wage

  Charges for broken dishes, walkouts, or cash register shortages that push a tipped employee below the minimum wage can be unlawful.

• Long stretches of non-tipped work

  An employee who spends a large share of a shift on work that does not earn tips, such as cleaning or prep, may be owed more than the tip-credit wage for that time. The Labor Department's guidance on this has changed in recent years, so the rule that applied to a given shift is worth checking.

• Missing notice or pay records

  A pay stub that shows only $2.13 an hour and no tips, hours, or tip credit may point to an employer that did not keep the records the law requires.

Higher State Rules

A state may require a higher cash wage for tipped employees, and some states do not allow an employer to take a tip credit at all. When federal and state law differ, the employee is entitled to the rule that is better for them. Local laws in some cities add another layer, so the state and city where you worked matter.

What Can Be Recovered

An employee can bring a claim for unpaid minimum wages, overtime, or tips that were kept. The law generally allows an additional equal amount as liquidated damages, along with attorney's fees and costs paid by the employer if the employee wins. A claim generally must be filed within two years of the violation, or three years if the violation was willful.

What to Save If You Think Tips Were Shorted

• Pay stubs

  Keep every stub, especially any that show your cash wage, hours, tips reported, and deductions.

• Tip records

  Save end-of-shift tip reports, card tip printouts, and your own notes on tips you received and shared.

• Schedules and messages

  Screenshots of schedules, group chats, and manager messages about tip pools, side work, or deductions can show how tips were handled.

• Written policies

  Save any handbook page, posted notice, or text that explains how tips or tip pools are handled.

Where to Find Official Guidance

The Department of Labor explains the tip credit and tip pool rules in Fact Sheet #15. For a broader look at wage claims, see our guides on your rights under the FLSA and how to recover unpaid wages. If you think your employer kept tips or paid you less than the law allows, a free consult can help you sort out which rules apply and which deadlines may be running.

Frequently Asked Questions