Tipped Employees and Employer Obligations

A tipped employee is an employee who engages 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 at least the federal minimum wage. If the employee's tips combined with the employer's direct wages of at least $2.13 per hour do not equal the federal minimum hourly wage, the employer must make up the difference. Many states, however, require higher direct wage amounts for tipped employees.

Tips Belong to Employee

Tips are the property of the employee. The employer is prohibited from using an employee’s tips for any reason other than as a credit against its minimum wage obligation to the employee (tip credit) or in furtherance of a valid tip pool. Only tips actually received by the employee may be counted in determining whether the employee is a tipped employee and in applying the tip credit.

Tip Credit

Section 3(m) of the Fair Labor Standards Act (FLSA) permits an employer to take a tip credit toward its minimum wage obligation for tipped employees equal to the difference between the required cash wage (which must be at least $2.13) and the federal minimum wage. Thus, the maximum tip credit that an employer can currently claim under the FLSA section 3(m) is $5.12 per hour (the minimum wage of $7.25 minus the minimum required cash wage of $2.13). Under certain circumstances, an employer may be able to claim an additional overtime tip credit against its overtime obligations.

Tip Pool

The requirement that an employee must retain all tips does not preclude a valid tip pooling or sharing arrangement among employees who customarily and regularly receive tips, such as waiters, waitresses, bellhops, counter personnel (who serve customers), bussers, and service bartenders. A valid tip pool may not include employees who do not customarily and regularly receive tips, such as dishwashers, cooks, chefs, and janitors.

Employer’s Information Requirements

The employer must provide the following information to a tipped employee before the employer may use the FLSA 3(m) tip credit:

• the amount of cash wage the employer is paying a tipped employee, which must be at least $2.13 per hour;

• the additional amount claimed by the employer as a tip credit, which cannot exceed $5.12 (the difference between the minimum required cash wage of $2.13 and the current minimum wage of $7.25);

• that the tip credit claimed by the employer cannot exceed the amount of tips actually received by the tipped employee;

• that all tips received by the tipped employee are to be retained by the employee except for a valid tip pooling arrangement limited to employees who customarily and regularly receive tips; and

• that the tip credit will not apply to any tipped employee unless the employee has been informed of these tip credit provisions.

The employer may provide oral or written notice to its tipped employees informing them of these items. An employer who fails to provide the required information cannot use the section 3(m) tip credit and therefore must pay the tipped employee at least $7.25 per hour in wages and allow the tipped employee to keep all tips received.

Employers electing to use the tip credit provision must be able to show that tipped employees receive at least the minimum wage when direct (or cash) wages and the tip credit amount are combined. If an employee's tips combined with the employer's direct (or cash) wages of at least $2.13 per hour do not equal the minimum hourly wage of $7.25 per hour, the employer must make up the difference.

Retention of Tips

A tip is the sole property of the tipped employee, regardless of whether the employer takes a tip credit. The FLSA prohibits any arrangement between the employer and the tipped employee in which any part of the tip received becomes the property of the employer. For example, even where a tipped employee receives at least $7.25 per hour in wages directly from the employer, the employee may not be required to turn over their tips to the employer.

Tip Pooling

As noted above, the requirement that an employee must retain all tips does not preclude a valid tip pooling or sharing arrangement among employees who customarily and regularly receive tips. The FLSA does not impose a maximum contribution amount or percentage on valid mandatory tip pools. But the employer must notify tipped employees of any required tip pool contribution amount; may only take a tip credit for the amount of tips each tipped employee ultimately receives; and may not retain any of the employees' tips for any other purpose.

Dual Jobs

When an employee is employed by one employer in both a tipped and a non-tipped occupation—such as an employee employed both as a maintenance person and a waitperson—the tip credit is available only for the hours spent by the employee in the tipped occupation. The FLSA permits an employer to take the tip credit for some time that the tipped employee spends in duties related to the tipped occupation, even though such duties are not by themselves directed toward producing tips.

For example, a waitperson who spends some time cleaning and setting tables, making coffee, and occasionally washing dishes or glasses is considered to be engaged in a tipped occupation even though these duties are not tip-producing. But where a tipped employee spends a substantial amount of time (in excess of 20 percent in the workweek) performing related duties, no tip credit may be taken for the time spent in such duties.

Service Charges

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. Sums distributed to employees from service charges cannot be counted as tips received but may be used to satisfy the employer's minimum wage and overtime obligations under the FLSA. If an employee receives tips in addition to the compulsory service charge, those tips may be considered in determining whether the employee is a tipped employee and in the application of the tip credit.

Credit Cards

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. For example, where a credit card company charges an employer 3 percent on all sales charged to its credit service, the employer may pay the tipped employee 97 percent of the tips without violating the FLSA. But this charge on the tip may not reduce the employee's wage below the required minimum wage. 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.

Youth Minimum Wage

The 1996 Amendments to the FLSA allow employers to pay a youth minimum wage of not less than $4.25 per hour to employees who are under 20 years of age during the first 90 consecutive calendar days after initial employment by their employer. The law contains certain protections for employees that prohibit employers from displacing any employee in order to hire someone at the youth minimum wage.

In New Jersey, tipped employees are those who regularly receive more than $30 per month in tips. While the federal law allows employers to pay a direct wage of $2.13 per hour if tips bring the total hourly wage up to the federal minimum wage of $7.25, New Jersey state law requires a higher direct wage for tipped employees. As of my knowledge cutoff in 2023, the minimum cash wage for tipped employees in New Jersey is $5.13 per hour, with a maximum tip credit of $2.12 per hour. Employers must ensure that the combination of direct wages and tips meets or exceeds the state minimum wage, which is higher than the federal minimum wage. Tips are the property of the employee, and employers are prohibited from using them for any reason other than as a credit against the minimum wage obligation (tip credit) or for a valid tip pool among employees who customarily receive tips. Employers must inform tipped employees about the tip credit provisions, and failure to do so means they must pay at least the full state minimum wage and cannot claim a tip credit. Tip pooling is allowed, but only among employees who customarily receive tips, and employers must notify employees of any required contributions. Employers cannot take a tip credit for time spent by an employee in non-tipped duties if it exceeds 20 percent of their workweek. Service charges are not considered tips and cannot be counted towards the tip credit. When tips are charged on a credit card, employers may deduct the credit card company's fee but must ensure the employee's wages do not fall below the minimum wage. New Jersey does not have a separate youth minimum wage; the state minimum wage applies to all employees regardless of age.