Tipped Employee Wage Rights: What Your Employer Must Pay You
What Is It?
Federal law lets employers pay tipped employees as little as $2.13 per hour in direct wages — but only under strict conditions. If tips don’t bring the employee’s total hourly compensation up to the federal minimum wage ($7.25/hour), the employer must make up the difference. Many employers violate these rules. And many states have higher minimums that eliminate or reduce the tip credit entirely.
How the Tip Credit Works
Under the Fair Labor Standards Act (FLSA), 29 U.S.C. § 203(m), an employer can take a “tip credit” against the federal minimum wage. Here’s the structure:
- Employer’s cash wage: at least $2.13/hour (the federal floor)
- Tip credit: up to $5.12/hour
- Required minimum: $2.13 + tips must equal at least $7.25/hour
If tips fall short: The employer must make up the gap. If you earned $2.13 in wages and only $4.00 in tips during a slow shift, your employer owes you $1.12/hour in additional wages to reach $7.25.
Conditions for taking the tip credit:
- The employer must inform you in advance that they are taking a tip credit.
- You must actually receive tips sufficient to make up the difference.
- Tips must remain yours — except for valid tip pools (see below).
Tip Pool Rules After the 2018 FLSA Amendment
The FLSA was amended in 2018 to clarify tip pool rules:
- Employers and managers cannot receive tips from a tip pool. This is a hard prohibition regardless of whether the employer takes a tip credit.
- Tip pools among tipped employees only (servers, bussers, bartenders, food runners) are permitted. An employer who does not take a tip credit can also include non-tipped employees (cooks, dishwashers) in a tip pool — a change made by the 2018 amendment.
- If an employer takes the tip credit, the tip pool is limited to customarily tipped employees. Back-of-house workers cannot be included in a tip-credit pool.
If your employer channels any portion of the tip pool to managers, supervisors, or owners, that is illegal under federal law and you are owed the full amount of those retained tips.
State Laws Often Go Further
At least 8 states have eliminated the tip credit entirely — meaning employers must pay the full state minimum wage before tips:
| State | Minimum wage (no tip credit) |
|---|---|
| Alaska | $11.91/hour (2024) |
| California | $16.00/hour (2024) |
| Minnesota | $10.85/hour (2024) |
| Montana | $10.30/hour (2024) |
| Nevada | $12.00/hour (2024) |
| Oregon | $14.20/hour (2024) |
| Washington | $16.28/hour (2024) |
| Wyoming | follows federal $2.13 minimum but cities may differ |
Many other states have a higher minimum wage than the federal $7.25 but still allow a tip credit, so the effective wage floor is higher.
How to File a Wage Claim
Option 1: File with the DOL Wage and Hour Division (WHD). The WHD investigates FLSA wage violations for free. File at dol.gov/agencies/whd/contact/complaints or call 1-866-4-US-WAGE (1-866-487-9243). There is no filing fee and you do not need an attorney. The WHD can recover up to 2 years of back wages (3 years for willful violations) plus an equal amount in liquidated damages.
Option 2: File with your state labor agency. State agencies can enforce state minimum wage laws, which may be more favorable. Many states also have shorter investigation times than the federal WHD.
Option 3: File a private lawsuit. Under the FLSA, you can sue your employer directly in federal or state court. You may recover unpaid wages, an equal amount in liquidated damages, and attorney’s fees. Many employment attorneys take FLSA cases on contingency.
What Most People Don’t Know
- Credit card tip deductions may be illegal. Federal law allows employers to deduct the credit card processing fee from tips paid by card (typically 2–3%), but the deduction cannot reduce your hourly wage below minimum wage. Many states prohibit any credit card deductions from tips.
- “Service charges” are not tips. A mandatory 18% gratuity added to a bill is a service charge that belongs to the employer, not the employee, unless the employer chooses to pass it through. You have no legal right to a service charge unless your employer’s policy says otherwise.
- The “dual jobs” rule limits the tip credit. If you spend more than 20% of your work time doing non-tipped work (cleaning, rolling silverware, prep), your employer may not take the tip credit for those hours. This is frequently violated.
- Tip theft by managers is a federal crime. The 2018 FLSA amendment made manager tip theft subject to civil money penalties of up to $1,100 per violation enforced by the WHD.
- You can file anonymously. The WHD accepts anonymous complaints. An employer cannot legally retaliate against an employee for filing a wage complaint, but anonymous filing reduces the risk.
Frequently Asked Questions
My employer takes a percentage of my credit card tips for “processing fees.” Is this legal?
Only if the deduction doesn’t bring your hourly wage below the minimum wage, and only up to the actual credit card processing cost. If your employer takes more than the actual processing fee, or if the deduction drops your effective hourly rate below the applicable minimum wage, it is illegal.
I work at a restaurant where the manager says he’s included in our tip pool. Is that allowed?
No. Managers and supervisors are prohibited from participating in tip pools under the 2018 FLSA amendment. This rule applies whether or not your employer takes a tip credit. You are entitled to recover the portion of tips diverted to your manager.
My employer told me the tip credit means I can be paid less than minimum wage. Is that always true?
Only if tips genuinely make up the difference. If there are shifts where your tips plus $2.13/hour don’t reach $7.25/hour, your employer owes you the gap for those exact hours — period. Keep records of your shift earnings.
I live in California. Does any of this apply to me?
California does not allow a tip credit. Your employer must pay you at least California’s minimum wage ($16.00/hour as of 2024) in direct wages, and all tips are 100% yours on top of that. California also prohibits employers from sharing in any tip pool.