Labor
The Ultimate Guide to Restaurant Tipping Laws
Sevenrooms
5 min read
Sep 8, 2022
Sevenrooms
5 min read
Sep 8, 2022
The U.S. restaurant industry is unique because it’s one of the few in the world which relies on tips to subsidize employees’ wages. In other countries where servers are paid living wages, gratuity is optional and only given when service is truly exceptional.
In the United States, however, a 15-20% tip is customary and expected no matter the quality of the service received. While this is an unspoken rule for customers, restaurant tipping laws regulate how much tipped workers need to make, who is eligible for tips and more.
Navigating these regulations can be tricky. We’ve created this guide to restaurant tipping laws to answer the common questions.
There are laws at all levels of government that regulate how much and how restaurant employees are paid.
On the federal level, the Fair Labor & Standards Act (FLSA) sets the federal minimum wage and the federal tipped minimum wage (also known as a “minimum cash wage”), regulates tip credits and mandates who is and who isn’t eligible to receive tips.
States can also set their own wage and tipping laws. Some states’ minimum wages and cash wages exceed the federal minimum. For example, while states like Texas and Georgia default to the federal tipped minimum wage of $2.13 per hour, states like California and Oregon mandate a tipped minimum wage of $14 and $12.75 per hour, respectively.
Finally, your local government may also have laws that determine employee wages. For example, New York City has a higher minimum cash wage ($10) than the rest of New York state ($8.80).
According to the U.S. Department of Labor (DOL), any employee who earns at least $30 per month regularly in tips is considered a tipped employee. Tipped employees are eligible to receive a cash wage that is lower than the federal minimum wage. Managers and restaurant owners aren’t eligible to receive tips.
The federal minimum cash wage for a tipped employee is $2.13 per hour. The federal minimum wage for untipped employees is $7.25 per hour.
According to the DOL, the following states have the same minimum cash wage as the federal minimum:
The following states have a higher minimum cash wage, and therefore a different tip credit, than what’s required under the FLSA:
These states don’t allow restaurants to take a tip credit. Instead, employers must pay the following state minimum wages before tips:
When restaurants opt to pay tipped employees the minimum cash wage, they’re taking what’s called a “tip credit.” A tip credit represents the difference between the minimum wage and the cash wage.
For example, in a state like Wyoming, whose minimum cash wage mirrors federal minimums, the maximum tip credit a restaurant can take is $5.12 per hour, which is the difference between the $7.25 minimum wage and the $2.13 minimum cash wage.
When employers take a tip credit, they have to make up the difference between the minimum wage and the tipped minimum wage if the employee’s combined wages and tips are less than the full minimum wage.
For example, if a server in Wyoming who works at a restaurant that takes a tip credit works 20 hours in one week, is paid the minimum cash wage of $2.13, and earns $50 in tips, they’ve earned $92.60 that week. The server must earn at least $145 ($7.25 per hour x 20 hours) that week, which means the employer needs to pay the server an additional $52.40 to make up the difference.
Restaurants can only claim a tip credit for employees who earn at least $30 per month in tips from the business on a regular basis.
Many states have higher state minimum wages and minimum cash wages, and different tip credits, than what federal laws require. You can find a list of these minimums on the Department of Labor’s website.
Tip pooling, also known as tipping out, refers to when tipped workers put their tips together and then distribute them among themselves at the end of a shift or pay period. Tips in a pool are usually split evenly, but they can also be shared in other ways.
When a restaurant takes a tip credit, tip pooling can be beneficial for several reasons. It’s a fair system that helps subsidize wages evenly because tips aren’t always directly correlated with the quality of service provided. And, when waitstaff works towards a common goal of creating the best customer experience possible, this fosters a sense of teamwork.
However, tip pooling is also controversial because the best servers are penalized because they don’t get to keep everything they’ve earned.
Tip pooling is legal according to restaurant tip out laws outlined by the FLSA. Here’s an overview of what the FLSA says about tip pooling:
Restaurant tip out laws allow for employers to mandate tip pooling. However, when tip pooling is mandatory, employers must redistribute tips within the same pay period in which they’re collected.
Furthermore, restaurants that don’t take a tip credit but mandate tip pooling have to keep payroll records that indicate how much employees received in tips.
Only businesses that don’t take a tip credit (i.e., pay staff the full minimum wage) can share tips with staff members who don’t rely on tips, such as kitchen staff or a dishwasher.
It is illegal for restaurant owners and managers to receive tips from the tip pool. However, they are allowed to contribute to mandatory tip pools.
Restaurant owners and managers can only keep tips when customers give them directly and for services that they completed without the help of other employees.
With restaurant tipping laws coming from all levels of government, parsing out what a tip credit is, who is eligible for tips and how much they need to be paid can be confusing. If you have questions after reading this guide, consult a legal professional.
If you want to help your employees generate more tips, SevenRooms can help. Book a demo today.
Under federal restaurant tip out laws, tip pools are legal. Employers can require employees to participate in a tip pool or otherwise share their tips with other employees. In a tip pool, employees have to chip in a portion of their tips, which are then divided among a group of employees.
Only businesses that pay staff the full minimum wage and don’t take a tip credit can share tips with staff members who don’t rely on tips, such as kitchen employees and dishwashers.
The difference between tip pooling and tip sharing is the way tips are distributed. With tip pooling, all tips are collected and then redistributed equally among all tipped employees. With tip sharing, a percentage of tips are collected and then distributed among all employees. Tip sharing is a voluntary process however, while oftentimes tip pooling can be required.
