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What is Considered a "Tipped Employee", Guidelines on Tip Credits, Pools, Service Charges and More

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What is Considered a "Tipped Employee", Guidelines on Tip Credits, Pools, Service Charges and More

By NicoleD
Published: March 23, 2010 Updated: February 10, 2011

Under the Fair Labor Standards Act (FLSA), a 'tipped employee' is someone in an occupation in which he or she customarily and regularly receives more than $30 per month in tips. An employer of a tipped employee is only required to pay $2.13 per hour in direct wages if that amount, combined with the tips received, equals the federal minimum wage. Many states, however, require higher direct wage amounts for tipped employees.

Find out more about your state's minimum wage law.

Tip Credits

Employers in some states can take what is known as a 'tip credit.' Under this policy, employers can pay employees less than the minimum wage ($7.25 per hour as of July 2009) if the employee's hourly wage, plus tips, equals the current minimum wage.

According to the Department of Labor (DOL), employers who chose to enact a tip credit policy must:

  • Inform each tipped employee about the tip credit allowance (including amount to be credited) before the credit is utilized.
  • Be able to show that the employee receives at least the minimum wage when direct wages and the tip credit allowance are combined.
  • Allow the tipped employee to retain all tips, whether or not the employer elects to take a tip credit for tips received, except to the extent the employee participates in a valid tip pooling arrangement.

Not every state allows this policy, so employers should check with their state labor department for the rules on this method of compensation.

Service Charges

Some service industries charge a minimum fee for large parties or special arrangements. In the restaurant industry, for example, it's commonly thought that servers earn this fee as their tip. However, employers do have discretion on whether or not they keep service fees.

The DOL advises that a 'compulsory charge for service, for example, 15 percent of the bill, is not a tip. Such charges are part of the employer's gross receipts. Where service charges are imposed and the employee receives no tips, the employer must pay the entire minimum wage and overtime'.

Check your state's rules on mandatory service fees - some states require establishments to explicitly show which, if any, portion of service fees go to employees.

Tip Pools

In some service establishments, workers contribute all or a portion of their tips to a tip pool, which is distributed among qualifying workers. Tip pools allow workers who don't usually receive tips directly from customers, such as dining room attendants, to share in the rewards good service.

The DOL provides guidance on fair tip pool practices:

  • Tipped employees may not be required to share their tips with employees who have not customarily and regularly participated in tip pooling arrangements. For example, in a restaurant, waiters and bartenders may be required to join tip pools with their fellow servers, like bus staff or hostesses, but they may not be required to participate in a tip pool with dishwashers, cooks, chefs, and janitors because these roles are not traditionally tipped positions.
  • An employee cannot be required into paying more into the pool than is customary and reasonable. The employee must be able to keep at least the full minimum wage.
  • Tips from a tip pool are prohibited from going to employers or, in some states, managers or supervisors. Businesses that have violated this rule have been ordered by courts to compensate the employees for the unlawful tip retention practices.

Credit Card Payments

Some states require employers to give employees the full tip indicated by the customer, while other states allow employers to deduct the credit card processing fee from the tipped amount to cover expenses. If your state allows this practice, it is important to note that charge on the tip may not reduce the employee's wage below the required minimum wage.

The DOL advises that the amount due to the employee cannot be paid later than the employee's regular pay day and may not be held while an employer is awaiting reimbursement from the credit card company.

Dual Jobs

When an employee is employed both a tipped and a non-tipped occupation at the same time, the tip credit is available only for the hours spent in the tipped occupation.

Tipped employees who spend a substantial amount of time (in excess of 20 percent) performing general preparation work or maintenance are not eligible for tip credits during the time spent in such duties.

Employers are required by the IRS to report wages, tips, or other compensation paid to their employees via tax Form 941. This tax reporting is usually done on a quarterly basis.



About the Author:


This is my first post so I am unsure if I am allowed to ask a question. Nevertheless, I own http://labarman.com which is a bartending service in Los Angeles. Because of the economy, I don't do a lot of business. My question has to do with taxes. Occasionally I will need a second bartender. My contract with them states that I am not their employer: they are an independent contractor. Since I am not their "employer," am I required to report the "...wages, tips, or other compensation" paid to them for an event, even if the bartender might work only one or two events in a year? Thank you for the great article. Dan

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