Do you earn tips? Plenty of employees in Minnesota 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 Minnesota legal protections for employees who receive tips. You can find out more about Minnesota minimum wage, tip rules, overtime standards, and other wage and hour issues at the Minnesota Department of Labor and Industry.
The basic rule of tips, under federal law and state 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:
Employees are entitled to earn the full minimum wage per hour as set by federal or state law, whichever is higher. Currently, the federal minimum wage is $7.25 an hour. The minimum wage in Minnesota is $10.08 per hour (in 2021), except small employers may pay $8.21 per hour. Small employers are those with less than $500,000 in annual gross revenue.
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 taking a tip credit. Minnesota law doesn't allow employers to take a tip credit though. All employees must be paid the full minimum wage for every hour worked, regardless of how much they make in tips.
Many states 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 must be able to keep at least the full minimum wage. (In other words, if the employer takes a tip credit, the employer can count only the tips the employee gets to take home against its minimum wage obligation.)
However, Minnesota does not allow required tip pooling. If employees voluntarily decide to share their tips, the employer may safeguard the shared tips and disburse them according to the employees' agreement. However, mandatory tip pooling is not allowed. (If more than one employee provides direct service to a customer, it is not considered tip pooling for those employees to divide the tip.)
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. Minnesota has this type of law. In Minnesota, tips include obligatory charges added to the bill, such as service charges, that customers might reasonably construe as a payment to the employee for service. The employer may not take any part of such a charge unless it provides clear and conspicuous notice to the customer, on the menu, bill, or other written materials provided to the customer, that the charge is not the property of the employee.
Any portion of a mandatory service charge that the employer pays out to employees 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.
Minnesota regulations allow employers to withhold a proportional amount of an employee's tip to cover the processing fee.
Updated February 11, 2021