How Tipped Employees Should Get Paid Under Federal Law

If you earn a living from tips, whether waiting tables, tending bar, carrying bags, or a similar occupation, it's crucial to understand how federal law protects your earnings.

Under the Fair Labor Standards Act (FLSA), employers must adhere to specific guidelines regarding the payment of tipped employees.

And while the basic definition is simple, a tipped employee is anyone who customarily earns more than $30 per month in tips; the payment rules can become complicated quickly.

Let’s break it down.

How Tip Credits Work

Under federal law, your employer can count part of your tips toward meeting the minimum wage requirements, a system known as the tip credit.

Here's how it works:

• Your employer can pay you as little as $2.13 per hour in direct wages.
• Your tips must bring you up to at least the federal minimum wage of $7.25 per hour.
• Your employer can’t claim more than $5.12 per hour in tip credit.
• If your tips, plus your base wage, do not meet $7.25 per hour, your employer must make up the difference. No exceptions.

What Your Employer Must Tell You

Before claiming a tip credit, your employer must inform you, either verbally or in writing, about:

• Your direct wage (at least $2.13/hour)
• How much of your tips will count toward minimum wage
• Your right to keep all your tips (except in a valid tip pool)
• The fact that tip credits cannot exceed the actual tips you earn

If your employer skips this step, they lose the right to claim a tip credit and must pay you the full minimum wage.

State Laws May Offer More Protection

Some states have stricter rules:

• They may require employers to pay a higher base wage.
• Some ban tip credits entirely.

If your state offers better protections than federal law, your employer must comply with the state's rules.

Your Tips Belong to You

Under the FLSA, your tips are your property.

• Employers cannot take or keep your tips.
• Supervisors and managers cannot take a share of your tips unless they personally and solely perform tipped work for that specific customer.

Even in tip pooling arrangements, managers are not eligible to receive tips from a tip pool that includes tips from other employees. The manager may, however, keep the tips they receive based on the service the manager directly and solely provides to the tipping customer. 

How Tip Pools Work

Some workplaces set up tip pools, where you share tips with other workers. Here’s what the law says:

Traditional Tip Pools (with Tip Credit) 

If your employer pays you less than the minimum wage and claims a tip credit:

• Only traditionally tipped employees, such as servers, bussers, and bartenders, can participate.

Other Tip Pools (No Tip Credit)

If your employer pays you at least the federal minimum wage of $7.25/hour:

• Non-tipped workers, such as cooks and dishwashers, may participate.
• Managers and supervisors are still excluded.

Employers must:

• Inform you of the tip pool rules
• Distribute tips fairly, typically by the regular payday

What Happens When You Work Two Jobs

If you work in two roles, like maintenance and serving, only the hours spent in a tipped position count toward tip credit eligibility. Example:

• Hours spent waiting tables (tipped): tip credit applies
• Hours spent doing maintenance (non-tipped): employer must pay full minimum wage

However, if you’re performing related duties (such as cleaning tables or setting up the dining room), that time can still count toward tipped work.

Special Cases: Credit Card Tips and Service Charges

Credit Card Tips

• Employers may deduct the credit card processing fee from your tips, but only the actual fee amount will be deducted.
• You must still receive minimum wage overall, and tips must be paid on the regular payday.

(Note: Some states ban deducting credit card fees — check local laws.)

Service Charges

• Automatic service charges, such as a mandatory 18% gratuity, are not considered tips under federal law.
• Service charges are considered regular wages and must be included when calculating the minimum wage and overtime.

Employer Recordkeeping Requirements

If your employer claims a tip credit, they must keep records of:

• Which employees are paid partially with tips
• How much tip income employees report
• The hours worked in both tipped and non-tipped roles

Even without a tip credit, employers must accurately track who earns tips and the amount of each tip.

Common Tip-Related Issues to Watch For

Disputes over tips happen, and sometimes employers break the rules.

Here are common violations:

• Failing to make up the difference when tips plus wages don’t meet minimum wage
• Paying only tips without paying the minimum $2.13/hour tip-credited wage
• Deducting money for uniforms, walkouts, or damages, causing pay to fall below the minimum wage
• Incorrectly calculating overtime based on the base tip credited wage instead of the full minimum wage
• Forcing you to share tips with non-tipped employees
• Managers or supervisors improperly taking a share of your tips

Concerned About How You’re Getting Paid? Morgan & Morgan Can Help

Do you have concerns about how you are being paid? Are you unsure if your rights are being respected? Please reach out to Morgan & Morgan today. We will review your case for free. Let’s make sure you’re getting every dollar you’ve earned.

Disclaimer: This information is based on fact sheets provided by the DOL.