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Tipped employees are those who work in occupations in which they customarily and regularly receive more than $30 a month in tips. An employer may count tips actually received by tipped employees as wages when calculating wages for purposes of FLSA minimum wage and overtime requirements. This is known as a “tip credit.” However, the employer must pay not less than $2.13 an hour in direct cash wages. Note that some states require or some employers may choose to pay direct wages of more than $2.13 an hour. Please refer to the Minimum Wages for Tipped Employees chart for more information.
An employer who chooses to use the tip credit provision must inform each tipped employee about the tip credit allowance; be able to show that the employee receives at least the Federal minimum wage when direct wages and the tip credit allowance are combined; and allow the tipped employee to retain all tips, except to the extent the employee participates in a valid tip pooling arrangement. If an employee's tips, combined with the employer's direct wages, do not equal at least the Federal minimum wage for each hour worked in a tipped occupation, the employer must make up the difference.
A compulsory (or mandatory) charge for service, for example, 15 percent of the customer’s bill, is not a tip. Such charges are part of the employer's gross receipts. Therefore, the employer has complete discretion in choosing the manner in which the compulsory charge is used, including whether or not to use it to pay his or her employees. Where an employee is paid by the compulsory service charge, the payment to the employee is considered a commission payment and not a tip.
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. 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. For questions about tips charged on a credit card, please contact your local Wage and Hour Division office.
For more information on tips, see Fact Sheet #15: Tipped Employees under the Fair Labor Standards Act.