Tip credit

The tip credit is the FLSA mechanism that lets employers count a portion of a tipped employee's tips toward the minimum wage. The employer pays a lower direct cash wage — at least the federal minimum cash wage set in the FLSA — and the employee's tips are credited for the difference, provided the math always reaches the full minimum wage.

The conditions that make it lawful

• The guarantee: cash wage plus tips must equal at least the applicable minimum wage for every workweek. If tips fall short, the employer makes up the difference.
• Notice first: employees must be told, in advance, that a tip credit will be taken and how it works. No notice, no credit.
• Tips belong to employees: managers and the business may not keep tips. Tip pooling among eligible staff is allowed within federal and state rules.
• Tipped work only: federal guidance limits how much non-tipped "side work" time can be paid at the tipped rate.

State law changes everything

States set their own tipped wages, and several — including California, Washington, Oregon, and others — prohibit the tip credit entirely: tipped staff get the full state minimum wage before tips. Some cities are phasing the credit out. For restaurant and hospitality operators in more than one state, tipped pay is genuinely a per-location rule, and the cost difference between locations can be significant.

FLSA, 29 U.S.C. § 203(m) and 29 C.F.R. Part 531 — US DOL Wage and Hour Division; state laws set higher tipped wages or prohibit the credit.

Related terms

• Minimum wage
• Overtime pay
• Pay stub