Disclaimer: This article is for informational purposes only and does not constitute legal advice. Laws vary by state and are subject to change. Consult an employment attorney for guidance specific to your business.
If you run a restaurant, you've likely heard of the tip credit, but the rules around it trip up even experienced operators. Here's a plain-English breakdown of what it is, what you must do to stay compliant, and where most teams get caught.
What Is a Tip Credit?
Under the Fair Labor Standards Act (FLSA) , employers can pay tipped employees a lower direct cash wage than the federal minimum wage, provided that tips make up the difference.
The amount by which tips offset the minimum wage obligation is called the tip credit .
At the federal level: Federal minimum wage: $7.25/hour Minimum cash wage for tipped employees: $2.13/hour Maximum tip credit: $5.12/hour If an employee's tips don't bring them up to at least $7.25/hour in any given workweek, the employer must make up the difference — no exceptions.
Key Rules to Know
- You must notify employees. Before taking a tip credit, you are required to inform employees of the tip credit arrangement, including the cash wage you'll pay and the tip credit amount. Failure to provide proper notice means you cannot legally take the credit.
- Tips belong to the employee. You cannot use tips for any business purpose, including to offset credit card processing fees in many states. Tips are the employee's property.
Take the guesswork out of tips
Track tips, reduce disputes, and keep the process consistent shift to shift, even as rules change.
The 80/20 rule applies.
If a tipped employee spends more than 20% of their time on non- tipped duties (like rolling silverware or cleaning), you may not be able to apply the tip credit to those hours. This is a frequent source of wage violations.
Back-of-house staff cannot be included.
If you take a tip credit, only customarily tipped employees can participate in a tip pool. You cannot include kitchen staff.
State Laws Often Override Federal Rules
Many states have eliminated the tip credit entirely — meaning all employees must be paid the full state minimum wage regardless of tips. These include: California, Oregon, Washington, Minnesota, Alaska, and Nevada, among others In these states, tips are purely supplemental income — they cannot be used to offset your minimum wage obligation at all.
Always verify your state's current rules, as this is one of the most frequently updated areas of wage law.
The Bottom Line
The tip credit can meaningfully reduce labor costs — but only if applied correctly. Misuse is one of the leading causes of wage and hour lawsuits in the restaurant industry. If you're taking a tip credit, make sure your records, notices, and time tracking are airtight.
SocialSchedules helps by tracking hours accurately across tipped and non-tipped duties — giving you the documentation you need to apply the tip credit with confidence.
If you are operating across multiple locations or states, the simplest risk-reducer is consistency: clear tip policies, accurate time tracking, and a workflow that makes exceptions visible before payroll runs.
SocialSchedules is an employee scheduling and labor management platform built for restaurants, retail, and hourly workforces.
Related resources
- Learn more about tip tracking: Tip manager
- See pricing and plans: Pricing
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