Tips, Tip Pooling, and Tip Credits: What Service Employees Need to Know

If you earn tips, you should know what your employer can and can't do with them.

Lots of service employees receive tips from satisfied customers, from waiters, waitresses, and bartenders to gardeners, cleaning staff, and movers. In fact, some employees earn more money in tips than in hourly wages.

If you receive tips as part of your compensation, you should know your legal rights. The basic rule of tips is that they belong to employees, not the employer. Employees can't be required to give their tips to the company or to share tips with managers or supervisors. However, employers typically can pay tipped employees less than minimum wage and require employees to share their tips with coworkers.

Tip Credits

Under federal law and the laws of most states, employers may pay tipped employees less than the minimum wage, as long as employees receive enough in tips to make up the difference. This is called a "tip credit" because the employer counts the employee’s tips towards its obligation to pay minimum wage. Your employer may take a tip credit only if you regularly earn more than $30 in tips per month.

The maximum tip credit allowed under federal law is $5.12. This means that employers may pay tipped employees as little as $2.13 per hour, as long as the employee makes enough in tips to earn at least $7.25 per hour (the current federal minimum wage). For example, if you earn only $3 per hour in tips, your employer must pay you $4.25 per hour. On the other hand, if you make $6 per hour in tips, your employer may take the maximum tip credit of $5.12 and pay you $2.13 per hour.

States often have different rules when it comes to tip credits. Most states allow employers to take a tip credit, but it might be smaller than the credit allowed under federal law. In these states, employees must earn enough in tips to make at least the state minimum wage; otherwise, the employer must make up the difference. Some states—including California, Minnesota, and Oregon—do not allow tip credits at all. Employees in these states must receive the full state minimum wage from their employers. (To find out what's allowed in your state, see our page on state laws for tipped employees.)

Tip Pooling

Under federal law, employers can require employees to participate in a tip pool or otherwise share their tips with other employees. In a tip pool, employees have to chip in a portion of their tips, which are then divided among a group of employees. However, federal law prohibits employers from keeping any portion of the tips or from including supervisors or managers in the tip pool. This is true regardless of whether the employer takes a tip credit or pays employees the full minimum wage.

For a long time, there was a debate about whether employees could be required to share their tips with employees who did not regularly receive tips. For example, some employers include all employees in a tip pool, which allows “back-of-house” staff—such as cooks or dishwashers—to receive a portion of the tips left for servers, bartenders, and other employees who interface with customers.

In March of 2018, the Fair Labor Standards Act was amended to clarify this issue. Employers that do not take a tip credit and pay employees the full minimum wage may establish a tip pool that includes back-of-house employees. However, employers that do take a tip credit must limit the tip pool to employees who customarily and regularly receive tips.

Credit Card Processing Fees

Tips belong to the employee, but can employers ever make any deductions from an employee’s tips? This issue commonly comes up with credit card processing fees. When a customer leaves a tip for an employee on a credit card, can the employer deduct the credit card processing fee from the tips?

Federal courts and the Department of Labor have generally held that employers may subtract a proportionate amount of the processing fee from an employee’s tips, as long as the employee still receives minimum wage. For example, if the customer pays by credit card and the processing fee is 3%, the employer may pay the employee 97% of the tip left by the customer and keep 3%. However, some states have more restrictive laws. In California, for instance, employers may not deduct any portion of the credit card processing fee from the employee’s tips.

Mandatory Service Charges

What about those mandatory service charges often tacked on to bills for large tables of diners, private parties, and 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, however, intended to make sure customers know what they're paying for. For example, New York's highest court has held that companies must give all mandatory service charges to their employees unless they make it clear to customers that the company is keeping the money. Similarly, the state of Washington requires companies to indicate on menus and receipts what portion of a mandatory service charge goes to the employee who served the customer.

To learn more about the rules governing tips and wages, get Your Rights in the Workplace, by Barbara Kate Repa (Nolo).

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