Learn about the Fair Labor Standards Act’s special minimum wage rules for tipped workers.
Most employers in the United States are required to pay at least the federal minimum wage under the Fair Labor Standards Act (FLSA) (29 U.S.C. § 206). States may enact their own minimum wage laws, provided that their minimum wage is greater than or equal to the federal rate. Tipped employees are a major exception to the FLSA’s minimum wage requirement. They usually rely on tips for most of their income.
Federal law defines a “tipped employee” as anyone involved in a job that “customarily and regularly receives more than $30 a month in tips.” This definition includes restaurant servers and other food service workers. Tipped employees are entitled to the minimum wage, but the rules are different than for other employees.
Who Owns Tip Income?
Under federal law and every state law, tip income belongs to the employee who receives the tip. The FLSA prohibits any requirement or agreement in which a tipped employee turns over all or part of their tips to the employer. Exceptions to this rule, which are discussed below, include “tip credits” and “tip pooling.”
The purpose of a tip pool is to make sure that everyone who directly contributes to customer service receives a fair share of tip income. A pool could be distributed evenly to all recipients, or it could distribute different shares based on factors like workload or customer contact.
If a customer includes a tip when paying by credit card, most states allow the employer to deduct the credit card processing fee—usually about three percent—from the employee’s tip. If a customer leaves a $5.00 tip on a credit card, the employer could withhold $0.15 to cover the processing fee. Some states prohibit this, requiring the employer to absorb that cost. Check with your state department of labor or an employment attorney in your area to learn about your state’s rules.
Tip Credits Under Federal Law
Since 2010, the FLSA has set the federal minimum wage at $7.25 per hour. Under the FLSA, employers may take a “tip credit” for the amount of tips received by a tipped employee. An employer must pay tipped employees at least $2.13 per hour. If that amount, when combined with the amount of tips received by an employee during a pay period, is less than the minimum wage, the employer must pay whatever amount is required to increase the employee’s pay to the rate of $7.25 per hour.
Example. A server in a restaurant receives $2.13 per hour in wages and $3.00 per hour in tips for an average hourly wage of $5.13. The employer must pay the employee an additional $2.12 per hour to reach the federal minimum wage of $7.25. The employer’s tip credit of $3.00 per hour is not enough to meet the minimum wage requirement.
As long as an employee’s tipped income is equal to or greater than $5.12, the employer is only required by law to pay $2.13 per hour. An employer’s tip credit cannot be greater than the amount of tips actually received by the employee.
Most states with a higher minimum wage still allow tip credits. New Jersey, for example, has a statewide minimum wage of $13.00 per hour as of January 1, 2022. Employers in New Jersey may take a tip credit of up to $7.87 per hour, the difference between the state minimum wage and the state base rate of $5.13 per hour.
Front-of-House vs. Back-of-House Employees
Before discussing tip pooling, it’s important to understand the different types of jobs in businesses where tipped employment is common. Using a restaurant as an example, “front-of-house” employees are those who interact directly with customers, such as servers, hosts, bartenders, and bussers. “Back-of-house” employees work behind the scenes and do not encounter customers in the ordinary course of their jobs. These include chefs, cooks, dishwashers, and administrative employees.
Some, but not all, front-of-house employees routinely receive tips. Back-of-house employees generally do not receive tips. A tip pool usually includes the front-of-house employees who receive tips. It might also include front-of-house employees who interact with customers but who don’t normally receive tips. Under limited circumstances, back-of-house employees may share in the tip pool.
Tip Pooling
A “tip pool” takes all of the tips received during a shift and distributes them among employees working that shift. A tip pool generally includes all employees who customarily receive tips, and may include other front-of-house employees like bussers, food runners, bar-backs, and others. It could also include some back-of-house employees, subject to new legal restrictions.
In 2020, the Department of Labor finalized a rule that prohibited managers and supervisors from keeping any portion of employees’ tips. This means that they may not participate in a tip pool, whether they work on a front-of-house or back-of-house basis.
If an employer does not take a tip credit, federal law allows it to create a mandatory tip pool that includes back-of-house employees. If, however, the employer does take a tip credit, only employees who interact with customers may share the tip pool.
The purpose of a tip pool is to make sure that everyone who directly contributes to customer service receives a fair share of tip income. A pool could be distributed evenly to all recipients, or it could distribute different shares based on factors like workload or customer contact. The amount actually received by an employee from the tip pool determines the amount of the employer’s tip credit.
Some states prohibit tip pooling or set limits on the practice, such as by only allowing employee-directed pools or requiring employers to provide written policies regarding tip pools.