Tip Credits, Tip Pooling and Other Wage Rules for Tipped Employees

Here's a tip: If you receive part of your compensation in tips from customers, you are subject to a special set of legal rules. Under federal law and the laws of most states, employers can take a tip credit -- that is, they can pay you less than the minimum wage -- if your tips make up the difference. You can also be required to share your tips with certain other employees. 

Employees Own Their Tips

Tips belong to the employee, not to the employer. Employees can't be forced to share their tips with the company. In some circumstances, employees can be required to tip out: to pool their tips with other tipped employees, then share the pool among a group of employees. But the employer can't be part of the tip pool. 

Some charges customers pay may look like tips, but the law allows employer not to count them as tips that must go to the employee. In some states, for example, an employer that has to pay a credit card processing fee for a particular customer's bill can subtract a proportionate amount of the tip, giving only the rest to the employee. And many states allow the employer to keep -- and not count as employee tips -- any mandatory "service charge" included on the bill. These charges are typically tacked on for large parties of diners and private parties. Even if the customer thinks the service charge is going to the employee (and therefore, doesn't tip), employers in most states are allowed to keep that money for themselves. 

Learn more about Your Rights for Payment.

The Tip Credit

Federal law and the laws of most states allow employers to take a "tip credit" against the minimum wage. If you earn at least $30 a month in tips, your employer can pay you as little as $2.13 an hour (under federal law; your state may require a higher minimum). However, if that wage plus the tips you actually earn don't add up to the regular minimum wage, your employer must pay you the difference. For example, if you are entitled to the federal minimum wage ($7.25 an hour), and your employer pays you the minimum for tipped employees of $2.13 an hour, your tips must cover at least the remaining $5.12 for every hour you work. 

Some states don't allow employers to take a tip credit. In these states, including California, employees are entitled to the regular minimum wage, plus their tips. 

Tipping Out

In many states, employers can require employees to tip out, or put a portion of their tips into a pool to be divided among a group of employees. An employee can't be required to chip in more than is customary and reasonable. The amount the employee has left after tipping out must equal at least the minimum wage; in other words, the employee gets to keep at least the amount the employer is counting toward the tip credit). 

Tips from a tip pool may not go to the employer or, in some states, to managers. Only employees who regularly receive tips can share in the tip pool; employees can't be required to share tips with employees who don't get them from customers. 

Learn more about Wages and Hours.

Getting Legal Help

If you believe your employer isn't following these rules, you should consult with an experienced employment lawyer. The laws that apply to tips vary from state to state. A lawyer can assess your situation, figure out whether your employer is paying you all of the tips and other compensation to which you're entitled, and help you assert your right to be paid fairly.

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