What is tip credit

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. 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. 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.

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. 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.

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. Hence why many employees tend to prefer tip credits—they usually earn more than the flat minimum wage. Remember, while there is a federal minimum wage and minimum cash wage, states get to set their own rules. That means the maximum tip credit will differ from state to state as well.

Most states allow for a tip credit. However, as the Department of Labor states , several states do not. These include:.

In these states, employers are required to pay tipped employees the full state minimum wage before tips. You could conclude that tipped employees in these states will have higher earning potential, as they receive minimum wage and get tips. Start by calculating the total tip credit by multiplying your tip credit amount by the number of hours they worked:. Multiply that minimum wage by the hours worked in that pay period:.

Next, figure out their cash wage the amount you pay them for that pay period, before tips :. Then you as the employer must make up the difference. Things get a little trickier when a tipped employee works overtime which is classified as over 40 hours per week. Instead, Werman Salas P. Credit Cards : Where tips are charged on a credit card and the employer must pay the credit card company a percentage on each sale, the employer may pay the employee the tip, less that percentage.

For example, where a credit card company charges an employer 3 percent on all sales charged to its credit service, the employer may pay the tipped employee 97 percent of the tips without violating the FLSA. However, this charge on the tip may not reduce the employee's wage below the required minimum wage. The amount due the employee must be paid no later than the regular pay day and may not be held while the employer is awaiting reimbursement from the credit card company.

The law contains certain protections for employees that prohibit employers from displacing any employee in order to hire someone at the youth minimum wage. This publication is for general information and is not to be considered in the same light as official statements of position contained in the regulations. The contents of this document do not have the force and effect of law and are not meant to bind the public in any way.

This document is intended only to provide clarity to the public regarding existing requirements under the law or agency policies. If an employee works more than 40 hours per week, the employer is not permitted to increase tip credits for the additional earnings, but is still required to pay overtime wages according to the law.

A tip pool is used to combine tips of all employees and then divide them within their group. Unfortunately, despite the law established to protected tipped employees, many employers still mismanage wages, either unintentionally or to take advantage of the confusion.

If you have questions about your wages as a tipped employee or you believe your employer has mismanaged your paycheck intentionally, we can help. Search for:.