Do you earn tips? Plenty of employees in Arizona do, including those who wait tables, serve and mix drinks, open doors, carry luggage, clean hotel rooms, or provide other services, from moving furniture to delivering newspapers. In fact, some employees earn more in tips from satisfied customers than in straight wages paid by their employers.
When you receive tips as part of your compensation, your legal rights under wage and hour laws become a bit more complicated. The rules about what counts as a tip, how much your employer must pay you, and whether you have to contribute to a tip pool (among other things) all depend on the laws of your state. Although federal law also covers these issues, employers must follow whichever law—federal, state, or even local—is the most generous to employees.
Here's what you need to know about federal and Arizona legal protections for employees who receive tips. You can find out more about Arizona’s minimum wage, tip rules, overtime standards, and other wage and hour issues at the Industrial Commission of Arizona.
The basic rule of tips, under federal and Arizona law, is that they belong to the employee, not the employer. Employers may not require employees to hand over their tips unless one of these exceptions applies:
Minimum wage laws protect all employees, whether or not they receive tips. Employees are entitled to earn the full minimum wage per hour as set by federal or state law. Currently, the federal minimum wage is $7.25 an hour. The Arizona minimum wage is $10 an hour, as of January 2017. Because Arizona’s minimum wage is more protective of employees, employees in Arizona are entitled to earn the Arizona minimum wage.
State laws differ as to whether the employer must pay the full minimum wage itself or may count an employee’s tips toward its minimum wage obligation. Under federal law and in most states, employers may pay tipped employees less than the minimum wage, as long as employees earn enough in tips to make up the difference. This is called a "tip credit." The credit is the amount the employer doesn't have to pay, so the applicable minimum wage (federal or state) less the tip credit is the least the employer can pay tipped employees per hour. If an employee doesn’t make enough in tips during a given workweek to earn at least the applicable minimum wage for each hour worked, the employer has to pay the difference.
Arizona law allows employers to claim a tip credit of $3 an hour. This means tipped employees can be paid as little as $7 an hour (for 2017), as long as they earn enough in tips to bring their compensation up to at least $10 an hour, total. If an employee doesn’t make at least $3 an hour in tips, the employer must cover the difference.
For employees who do other types of work in addition to the work for which they receive tips, the employer can claim a tip credit only for the hours spent on tipped work. For example, if a waitress works a six-hour table shift, then spends two more hours cleaning the restaurant after closing time, Arizona law requires the employer to pay her at least the full minimum wage for the two hours she spends on non-tipped duties. It may claim the tip credit only for the six hours she spends actually waiting tables.
Many states, including Arizona, allow employers to require tip pooling or “tipping out.” All employees subject to the pool have to chip in a portion of their tips, which are then divided among a group of employees. An employee can't be required to pay more into the pool than is customary and reasonable, and the employee must be able to keep at least the full minimum wage. (In other words, if the employer takes a tip credit as allowed by Arizona law, the employer can only count the tips the employee gets to take home against its minimum wage obligation.)
According to the federal Department of Labor, only employees who regularly receive tips can be part of the pool. Employees can't be required to share their tips with employees who don't usually receive their own tips, like dishwashers or cooks. However, Arizona law allows employers to require tip pooling with employees who don’t receive their own tips. (The employer cannot claim a tip credit for employees who don’t receive their own tips: They must be paid the full minimum wage by the employer, in addition to any tips they are allowed to share from the pool.)
No employers are allowed in the pool: Tips from a tip pool can't go to the employer or, in some states, managers or supervisors. Employees must receive a written notice regarding the tip pool.
Right now, Arizona and the other states in the Ninth Circuit of the federal judiciary (a geographical region that includes the Pacific states) are in a special situation. In 2013, a federal district court in Oregon decided that federal rules on tip pooling apply only if the employer takes a tip credit. Under this ruling, employers who don’t (or can’t) take a tip credit may handle tips and tip pooling as they wish, including requiring employees to share their tips with the back of the house.
Because of this controversy, the federal Department of Labor has said that it will not enforce its tip rules in states in the Ninth Circuit until this issue is decided once and for all. Because Arizona law already allows employers to require tip pooling with employees who don’t earn their own tips, however, this dispute won’t have much effect on tipped employees in Arizona.
It's not as easy as you might think to figure out exactly how much of what a customer pays is a "tip." If the customer pays in cash and tipping is voluntary, whatever amount the customer leaves over and above the charge for products or services (plus tax) is a tip. However, if the employer imposes a mandatory service charge, or the customer pays by credit card, the rules might be different.
Some restaurants tack a “mandatory service charge” on to bills for large tables of diners, private parties, or catered events. Under federal law and in most states, this isn't considered a tip. Even if the customer thinks that money is going to you and doesn't leave anything extra on the table, your employer can keep any money designated as a "service charge." The law generally considers this part of the contract between the patron and the establishment, not a voluntary acknowledgment of good service by an employee. Many employers give at least part of these service charges to employees, but that's the employer's choice: Employees have no legal right to that money.
A couple of states have different rules, intended to make sure that customers know whether their money is going to the employer or the server. However, Arizona isn’t one of them. Under Arizona law, an employer is free to keep all or part of any mandatory service charge added to a bill.
A 2014 rule change by the Internal Revenue Service has created a significant incentive for employers to stop imposing mandatory service charges, if the employer hands any of that money over to employees. When an employer pays out any portion of a mandatory service charge to its employees, that money must be treated as wages, not tips. This means the employer must withhold and pay Social Security and Medicare (FICA) tax on these amounts, may not claim a credit against its tax obligations for these amounts (as it can for tips), and must include them as part of the employee’s hourly wage when determining overtime payments, among other things. The rule applies only to mandatory service charges. For the amount to count as a tip rather than a service charge, all of the following must be true:
State rules differ as to whether employees are entitled to the full amount of a tip left by credit card. If the employer has to pay the credit card company a processing fee, some states allow the employer to subtract a proportionate amount of the tip to cover the employee’s “share” of the fee. For example, if the credit card company charges a 3% fee, the employer could legally reduce the employee’s tip by 3% as well.
Arizona has no law that explicitly prohibits employers from requiring tipped employees to share in the credit card processing fee.