Who Took the Tips From the Tip Jar? – Tip Credit and Tip Pools

By May 25, 2018 No Comments

Tipping practices and minimum wage laws vary from state-to-state. Under the Fair Labor Standards Act (FLSA), the tipping rules are pretty straightforward and the consequences for violating them are significant. This post covers the basic tipping rules under the FLSA.

Who Are Tipped Employees?

Under federal law, tipped employees are those who customarily and regularly receive more than $30 per month in tips. These employees include waiters, waitresses, bellhops, counter personnel (who serve customers), bussers, and service bartenders. In addition, the tips must be received for an employee’s work, and not for merely because an employee is in a tip pool arrangement. Tipped employees do not include workers such as dishwashers, cooks, chefs, and janitors.

Who Can Participate in a Tip Pool?

The most important factor to remember with respect to tips is that tips are employee property. On April 6, 2018, the DOL’s Wage and Hour Division issued a Field Assistance Bulletin (FAB) advising that “back of the house” employees, such as cooks and chefs may participate in a tip pool if the employer does not take a tip credit (discussed below). In other words, if the employer pays all of its employees at least minimum wage, tips can be pooled among the employees. However, managers and supervisors are still prohibited from participating in a tip pool regardless of whether a tip credit is taken. Before a tip pool arrangement can be implemented, the employer must notify tipped employees of any required tip pool contribution amount. However, there is no legally required amount or percentage.


What Are the Consequences of an Invalid Tip Pool?

Non-tipped workers who receive tips from the tip pool automatically invalidate the tip pool for all tipped employees. If the employer or other non-tipped employees participate in the tip pool, you must pay the tipped employees the full minimum wage and any tips the tipped employees contributed to a tip pool that included non-tipped occupations. In other words, an employer can no longer take a tip credit and the employees’ tips must be returned.

What is a Tip Credit?

Generally speaking, a tip credit allows an employer to pay less than the federal or state minimum wage by deducting a certain amount of money an employee makes from tips. State laws vary as to how much an employee must make in tips to be considered a tipped employee; whether a tip credit can be taken; and the minimum cash wage an employer is required to pay. Only 7 states do not provide for some mechanism for a tip credit to be taken. Under federal law, there is specific information you must provide to employees before an employer can take a tip credit:

  1. The amount of cash wage the employer is paying a tipped employee, which must be at least $2.13 per hour;
  2. The additional amount claimed by the employer as a tip credit, which cannot exceed $5.12;
  3. That the tip credit claimed by the employer cannot exceed the amount of tips actually received by the tipped employee;
  4. That all tips received by the tipped employee are to be retained by the employee except for a valid tip pooling arrangement limited to employees who customarily and regularly receive tips; and
  5. That the tip credit will not apply to any tipped employee unless the employee has been informed of these tip credit provisions.

In other words, if John, a tipped employee, only makes $4.00 in tips an hour, the employer must pay John $3.25 per hour. At no point can the tip credit cause a tipped employee to earn less than the minimum wage. In contrast, if John made $20.00 in tips an hour, the employer must still pay John a minimum of $2.13 per hour.

What are the consequences for failing to provide the required information to tipped employees?

The tip credit cannot be taken and tipped employee must receive $7.25 per hour and all of his tips he received.

One last important point, the tipped credit only applies to time spent in the tipped occupation. For employees who work in both tipped and non-tipped occupations, the tip credit can only be taken for the tipped hours. For example, if John is both a cook and a service bartender. The tip credit can only be taken for his time worked as a bartender.

What Deductions Can Be Made?

When an employer receives a tip credit, it is understood that the tipped employee is only paid minimum wage for all non-overtime hours worked in a tipped occupation, regardless of how much the employee actually makes in tips. Employees can never be charged deductions that result in earning less than minimum wage. Therefore, an employer cannot deduct for walkouts, cash register shortages, breakage, cost of uniforms, etc. against a tipped employee’s pay if the employer is claim tip credit. The employer may, however, deduct credit card fees for tips charged on credit cards so long as those deductions do not result in the employee making less than the minimum wage.


The failure to comply with tip rules can be very costly for the employer. It is important to understand how tip pools and tip credits operate before participating in such an arrangement. Violating tip rules can result in owing your tipped employees minimum wage on top of all of their tips.

Do you have questions regarding how tips work in your state? Contact your HR Consultant.

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