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Tip Credit and Tip Pooling Laws

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Tip Credit and Tip Pooling Laws

Working for a restaurant (or other job where your primary income is earned in tips) can raise questions about the types of income rights you have and the extent to which your employer is permitted to manage your tips.

This guide will help answer some common legal questions that arise with tipped income in the service industry.

Tip Credits and Minimum Wage

Depending on which state you live in, your employer may be allowed to pay you less than minimum wage, as long as you are still earning at least minimum wage with tips. This is called a "tip credit" because the amount you earn in tips is credited toward the calculation of your overall wage.

  • Tip Credit States: States that allow tip credits still have separate lesser minimum wages that employers must pay to tipped employees. For example, in Illinois, the minimum wage is currently $8.25, but the minimum wage for tipped employees is only $4.95. Thus, even in tip credit states, employers still owe restaurant servers some amount of hourly wage as determined by the state.
  • Non-Tip Credit States: However, in other states, like California, employers are required to pay servers the regular minimum wage regardless of how much the server earns in tips. You can check to see the minimum wage tipped employees are owed in each state on the U.S. Department of Labor website.
  • Remedies: If your hourly wage combined with your tips is still less than your state’s minimum wage, then your employer must compensate you for the difference. If your employer fails to pay you the minimum wage required by your state, then you may be entitled to back-pay for lost wages.

Tip Pooling

Many restaurants have tip-pooling systems where servers must tip-out bartenders, bussers, hosts, and other restaurant employees. They may even require that all bartenders or servers on the floor split their tips evenly amongst themselves.

While these tip pooling systems may decrease the amount of tips you take home, they are generally legal so long as the tip pooling system is fair, and only employees involved in the "chain of service" receive tips. However, your employer is never allowed to receive any portion of your tips, and in some states managers and supervisors are also prohibited from participating in the tip-pool.

Tip Deductions

In some instances, your restaurant employer may attempt to dock your pay or seize a portion of your tips for other reasons, such as:

  • A table that fails to pay
  • Server food order mistakes
  • A cash register shortage

Here, while this may seem unfair, depending on the state you live in, this may be permissible so long as the pay-docking does not deplete your income below minimum wage.

However, in other states, such as California, this type of pay-docking is unlawful unless the employer can show that the employee acted dishonestly, willfully, or in a grossly negligent manner. Still, although pay-docking in these situations may be impermissible, employers are still allowed to discipline employees for mistakes.

Tip Payment

When a restaurant server is paid tips on customer credit cards, the employer must pay the server those tip amounts in full by the next scheduled pay-day. However, depending on the state, the employer may be permitted to decrease the credit card tip amounts by whatever percentage the credit card company charges for its service.

Contacting an Attorney

If you believe your restaurant employer is handling your wages unlawfully, you should contact an experienced attorney to find out if you are entitled to back-pay or other legal relief.

Photo of page author Grant Atkinson

, LegalMatch Legal Writer

Last Modified: 04-24-2016 05:09 AM PDT

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