United States: The FLSA After 80 Years, Part III: The Tip Credit Is Here To Stay

Last Updated: July 17 2018
Article by Liz S. Washko

It is quite common in the hospitality industry for employers to pay tipped employees a cash wage that is less than the required minimum wage. This practice is permissible under the Fair Labor Standards Act's (FLSA) tip credit provisions. The philosophy underlying the tip credit is that the tipped employees are receiving compensation in the form of tips from customers, thereby relieving the employer of some of the burden associated with paying the full minimum wage.

This article discusses the history of the tip credit, tip credit requirements, recent changes to tip credit law, and potential pitfalls for employers paying a tip credit wage.

History of the Tip Credit Wage

The tip credit provision first became part of the FLSA in connection with the 1966 amendments to the statute. At that time, the tip credit was equal to 50 percent of the minimum wage. Thus, an employer could take a tip credit by paying a tipped employee only half the required minimum wage under the assumption that the tips the employee received from customers would make up the other half of the minimum wage.

In 1991, the minimum tip credit wage was set at $2.13 per hour葉ied to 50 percent of the then-current minimum wage of $4.25 per hour.

Amendments to the FLSA that were implemented in 1996 modified the tip credit wage provisions so that the minimum tip credit wage would remain at $2.13 per hour, even as the regular minimum wage was scheduled to increase over time. It has remained at $2.13 per hour since then.

Tip Credit Requirements

Employers may apply the federal tip credit provisions only to employees who qualify as tipped employees. The FLSA defines a tipped employee as an employee who customarily and regularly receives more than $30 per month in tips. Typically, this includes employees like servers, bartenders, and bussers.

For the tip credit to apply, the employer must pay a cash wage of at least $2.13 per hour and the employee must be allowed to retain all tips received except for those tips subject to a valid tip pool. In addition, the employer must give tipped employees notice of application of the tip credit. While this notice can be verbal, employers may want to put the notice in writing and have tipped employees provide a signed acknowledgment that they received such notice.

A valid tip pool involves the sharing of tips received from customers between and among tipped employees. For example, in a tip pool, a server may share a portion of the tips he or she received during a shift with the busser who was assigned to bus and clean his or her tables and the bartender who made the drinks for the server's customers. A tip pool that includes paying a portion of tips to nontipped employees様ike cooks and dishwashers葉ypically will not qualify as a valid tip pool.

Many states have their own wage and hour laws that include tip credit provisions that differ from those in the FLSA. These state requirements could include mandating a higher cash wage component or prohibiting use of a tip credit altogether.

Recent Developments Regarding the Tip Credit

In 2011, the U.S. Department of Labor (DOL) issued a regulation that extended the tip pooling requirements to tipped employees who were receiving the full minimum wage on the basis that tips received by a tipped employee are that employee's property, regardless of whether the employer takes a tip credit. Subsequently, several courts held that regulation to be invalid, although the DOL maintained the validity of the regulation until recently.

In December 2017, the DOL proposed to rescind that regulation.

On March 23, 2018, President Donald Trump signed into law a bill that included the Tip Income Protection Act of 2018. The law amended the FLSA, providing that "[a]n employer may not keep tips received by its employees for any purposes, including allowing managers or supervisors to keep any portion of employees' tips, regardless of whether or not the employer takes a tip credit." It further provided that violations of the law would result in employer liability for the amount of any tip credit taken and all tips unlawfully kept by the employer, plus liquidated damages.

In addition to these legal developments, some restaurant employers have been experimenting with eliminating tips altogether and paying employees at or above the minimum wage. These experiments have had mixed results.

Common Tip Credit Pitfalls

The following is a discussion of common tip credit pitfalls that may result in employers losing the tip credit, in whole or in part, and otherwise subject employers to liability洋ore often than not, on a collective action basis. If an employer loses the tip credit, it has lost the ability to take the tip credit at all for the period in which the violation occurred as to those employees affected by the violation. Additionally, the employer will need to pay the difference between the tip credit wage and the federal minimum wage for that period as damages. This can have significant consequences, as it could result in the employer having to pay $5.12 per hour for every hour the affected tipped employees worked during the two- or three-year limitations period, plus liquidated damages.

Failing to Give Notice: If an employer fails to give proper notice of application of the tip credit to tipped employees (or cannot prove that it did so), the employer will lose the tip credit altogether.

Failing to Account for and Remedy Tip Shortfalls: Where an employee fails to earn enough tips to fill the gap between the cash wage and the federal minimum wage, the employer needs to increase the employee's cash wage to make up the difference. This is designed to ensure that tipped employees are receiving at least the minimum wage. In order to assess this, an employer can have a system in place to account for tips received (this is also required by Internal Revenue Service regulations), calculate whether the tips are sufficient, and provide for payment of any shortfalls. Failure to have such a system in place and to timely remedy tip shortfalls could result in potential liability for those shortfall amounts.

Invalid Tip Pools: As noted above, a valid tip pool generally involves a sharing of tips between and among tipped employees only. A number of cases have involved allegations that managers were requiring tipped employees to share tips with them or employers were requiring the sharing of tips with nontipped employees. As with the failure to give notice of the tip credit, a finding that an employer required an invalid tip pool will invalidate the tip credit altogether. Moreover, under the recently passed legislation regarding tip pooling, the employer also will be required to compensate the employee for any tips illegally retained.

Taking Deductions From Tips/Pay: A number of cases have involved allegations that employers required tipped employees to pay for things such as customer walkouts (where the customer leaves without paying the check), cash register shortages, food or drink mistakes, and broken plates or glasses. Tipped employees are considered to be minimum wage employees容ven if they make hundreds or thousands of dollars in tips during the workweek. Thus, any deductions from their pay for these types of expenses are considered deductions that drop their pay below the minimum wage and violate the FLSA.

Incorrect Overtime Calculations: Calculating overtime for tipped employees is a little tricky, and mistakes are made when those responsible for calculating payroll do not understand this. A common mistake is to use the tip credit wage to calculate overtime. In fact, the overtime rate is calculated at one-and-one-half times the applicable minimum wage, less the basic tip credit. For example, where the minimum wage is $7.25 per hour, the overtime rate is generally $10.875 per hour. However, for a tipped employee, the employer would be obligated to pay a cash overtime wage of $5.755 per hour ($10.875 minus $5.12).

Key Takeaways

It appears that the tip credit is here to stay. Employers that take the appropriate steps to ensure they have the correct infrastructure in place to utilize the tip credit can minimize the risk of potential FLSA liability associated with tip credit employees.

This is part three of a three-part series commemorating the 80th anniversary of the Fair Labor Standards Act. Part one, " The FLSA After 80 Years, Part I: Major Changes, Current Compliance Concerns, and Possible Revisions," discusses how the FLSA has changed in the last eight decades, current areas of concern for employers, and revisions that are likely to be made in the near future. Part two, " The FLSA After 80 Years, Part II: Eight Decades of the Fair Labor Standards Act," reviews the history of the FLSA, including amendments, proposals, and areas of potential reform.

A version of this article was previously published on Law360.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Similar Articles
Relevancy Powered by MondaqAI
Ogletree, Deakins, Nash, Smoak & Stewart
In association with
Related Topics
Similar Articles
Relevancy Powered by MondaqAI
Ogletree, Deakins, Nash, Smoak & Stewart
Related Articles
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Mondaq Free Registration
Gain access to Mondaq global archive of over 375,000 articles covering 200 countries with a personalised News Alert and automatic login on this device.
Mondaq News Alert (some suggested topics and region)
Select Topics
Registration (please scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq痴 use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor痴 own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq痴 Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq痴 Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq痴 right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions