The Federal Labor Standards Act (FLSA), originally passed in 1938 and frequently updated since, defines a tipped employee as one who earns $30 a month or more in tips. For workers without state, county or city laws restricting the practice, workers under FLSA can receive a reduction in hourly pay that is covered by tips received. 

Improper use of tip credit for employees is a common wage and hour dispute, and lawsuits are common when employers improperly use tip credits to reduce wages.  Here, we explore the latest rules from the Department of Labor, and common errors employers make when attempting to reduce employee owed wages with these credits. 

FLSA Tip Credit 

FLSA establishes the rules for how employers may use a tip credit to meet the federal minimum wage requirement. The tip credit provision allows employers of tipped employees to count part of their employees’ tips toward satisfying their minimum wage obligation. Employers can claim a credit as long as the employee’s tips make up the difference to meet the federal minimum wage of $7.25 per hour.  

Under this rule, employers may pay tipped employees a base wage of $2.13 per hour and claim a tip credit of up to $5.12 per hour to cover the remainder of the minimum wage requirement. If an employee’s total earnings (tips + hourly wage) do not meet the federal minimum wage, the employer is legally obligated to compensate for the shortfall. Employees cannot earn below the minimum wage, for all time work. 

Time worked includes any improper off the clock time worked, such as time spent closing or opening a restaurant or other establishment not on the clock. Tips includes the amount the worker earned and kept, not just the amount of tips received to the table or originally collected by the employee.  Fees paid for credit card transactions, or tips lost to tip pools, cannot count toward the minimum wage the worker must receive. 

Time spent doing non-tipped worked, if it surpasses thresholds, cannot be included in time that receives tip credits. For example, if you arrive at work 45 minutes before it opens and spend 45 minutes getting a facility ready for customers, you cannot receive tip credit for those 45 minutes and that time must be paid at $7.25 or more per hour. 

Who Qualifies as a Tipped Employee? 

The federal rule simply states that those customarily and regularly making more than $30 per month in tips could be defined as a tipped employee. 

Common job titles include: 

• Servers / Waiters 
• Bartenders 
• Valet Parking Attendants 
• Hotel Bellhops 

Prior Notice to Tipped Employees 

Employers must inform employees, verbally or in writing: 

• The cash wage they will be paid. 
• The amount claimed as a tip credit. 
• That tips plus cash wage must meet the minimum wage. 
• That employees keep all their tips unless participating in a valid tip pool. 

This must be done prior to the labor being performed. 

Tip Pooling 

Tip pooling is when employees performing tipped work share a portion of their tips with other eligible tipped employees.  The tips go to a communal pool from each eligible employee in the pool, and then are redistributed.  The goal of a tip pool is to even out tips received across a set of tipped staff, and allows employees performing work for customers who are tipping also can receive tips even if they are not directly the employee tipped (bartenders making drinks for table service, bussers, food runners, bar backs). 

Even thought a restaurant’s main draw is typically the food, those in the job roles preparing the food are typically ineligible for a tip pool, as are those who have job roles cleaning, preparing or managing the restaurant or services.  Cooks and chefs, managers and supervisors, janitors and dishwashers are typically not eligible for the pool.  Employees in the tip pool must be performing tasks related to the service of the customer, or are customer facing (a bartender at the bar with customer seating, vs a chef at the back). 

If employers want to include other workers in the pool, they can do so by not claiming a tip credit for the tipped employees.  That would mean no tip credit for waiters or servers, but then a tip pool that includes dishwashers, cooks and food prep staff.  In this scenario, the managers and supervisors are still excluded from the tip pool. Managers and supervisors may keep tips only if they were the direct server for a customer, and are eligible only for that tip from that customer. 

In order for a tip pool to be legally designed, notice must be given in advance of the wages and tips earned. The notice must include which employees will be in the pool and how the tip pool will be calculated. 

Tips “lost” to a tip pool (if a server puts more into a pool than they receive) must not bring the employee under the minimum wage. All employees at all times must be earning at least the minimum wage.  Employers are not to favor any specific employee in creating a tip pool. 

The most common errors by employers include: 

• Managers and supervisors being in the tip pool 
• A tip pool that was not explained to (all) staff 
• Employers retaining a portion of the pool for themselves 
• Including ineligible employees in the pool when also claiming tip credit for other employees 
• Reducing the wage of an employee below minimum wage 
• Failure to track wages correctly on a weekly basis 

When is Tip Credit Calculated? 

The law requires that an employer’s use of the tip credit be calculated on a workweek basis, not daily or per paycheck. A workweek may start on a different date than Sunday or Monday, depending on the employer, but would always be a week long.  

Employers must ensure that over the course of the entire workweek, the combination of the employee’s cash wage and their tips equals or exceeds the federal minimum wage of $7.25 per hour, for all hours that fall into tipped wage credit.  An employee may work some shifts, or portions of a shift, in job roles ineligible for tipped credit, and the tipped credit cannot be applied during these periods. 

Tip Credit During Overtime 

When a worker is earning overtime such as working over 40 hours a week, both wages and tip credit are multiplied by 1.5.  A worker earning a minimum of $7.25 per hour must now earn $10.88 per hour, with a maximum tip credit of $7.68 per hour.  The tip credit would again be calculated for the week, to see that a worker received the correct minimum wage.  As before, there is no scenario where an employee should earn below the minimum wage including overtime payments on the minimum wage for hours worked over 40. 

Dual Job Roles 

The dual jobs rule under the Fair Labor Standards Act (FLSA) addresses situations where an employee performs both tipped duties (like serving tables) and non-tipped duties (like cleaning or food prep). This rule helps determine whether an employer can claim the tip credit for all hours worked. 

A dual job is when a worker is assigned multiple roles, one that could be eligible for tips and tip credit, and one that could not. 

For example, a worker who is a server when the business is open but is prepping food or cleaning for periods when the business is not open to customers, would have a dual role. This is different than small periods of work performed during service hours that is on top of service roles. 

An example:  A server works for 8 hours per day when the business is open, assisting customers.  Across the 8 hour shift, they will spend approximately one hour non-consecutively: 

• Rolling silverware 
• Cleaning tables 
• Making drinks, coffee, or other beverages 
• Stocking service necessities such as napkins 
• Refilling condiments 

This work performed along side their service duties would not be a dual role, as long as it is not for extended periods of time exceeding 30 minutes at a time.  If a server breaks from service to refill condiments for 15 minutes and returns to service, this is considered part of the tip credit period of a shift. 

An example of a dual role that could be ineligible for tip recit: 

A worker arrives at work 1 hour before and leaves 1 hour after a restaurant opens on a Sunday.  They perform an hour of tasks preparing the restaurant for open service, and after 6 hours of service another hour cleaning the restaurant at the end of the shift.  This worker has a dual role both during the first and last hour of their service, when the restaurant isn’t open to customers at all.  They are not eligible for tip credit reduction in wages for these two hours. 

Another example of work not related to service duties: 

A worker arrives at work and serves tables. During service they stop work to perform tasks wholly unrelated to service duties, including cleaning a kitchen or taking a shift washing dishes.  This period of labor is not related to service if it exceeds 30 minutes. If a workers stops service for an hour to deep clean a kitchen, or take an hour shift at the dishwasher station, that hour is not tip credit eligible. 

80/20 Rule 

Historically, the 80/20 Rule stated that if tipped employees spent more than 20% of their time on non-tipped duties, the employer had to pay them the full minimum wage for that non-tipped time. As of 2021, this rule has been updated with new guidance around the length of time non-tipped tasks take during a shift. 

30 Minute Rule 

The updated guidance added the 30-Minute Rule, which requires that: 

• If a tipped employee spends more than 30 consecutive minutes performing non-tipped duties, the employer must pay the full minimum wage (no tip credit) for that time. 
• This ensures employees are not spending excessive time on non-tipped tasks while still being paid the reduced tipped wage. 

Examples: 

• A server spends 20 minutes cleaning tables between busy periods. The employer can still apply the tip credit. 
• A server spends 10 minutes prior to opening folding napkins and rolling silverware. The employer can still apply the tip credit. 
• A server spends 45 minutes folding napkins and refilling condiments without performing tipped duties between service periods. The employer must pay the full minimum wage for that 45 minute period and no tip credit can be applied to this 45 minute period. 
• A service spends an hour after the restaurant closes assisting with cleaning and closing of the restaurant. The employer must pay full minimum wage without a credit for this hour. 

Minimum Wage Law Firm 

If you believe you are not being paid for all of the time you have worked, are not being paid the proper minimum wage, or are not being paid the overtime due to you, we invite you to schedule a consultation with an employment law attorney in our California, Texas or Puerto Rico offices. Schneider Wallace Cottrell Konecky LLP is a national law firm that represents employees in a wide range of employment law cases, including class action lawsuits involving the failure to pay wages, overtime pay and commissions. Contact us at 1-800-689-0024.