Skip to main content
  • Foundation
  • Executive network
  • CEO Circle
  • SHRM Business
  • Linkage Logo
  • Store
  • Sign In
  • Account
    • My Account
    • Logout
    • Global
    • India
    • MENA
SHRM
About
Book a Speaker
Join Today
Renew
Rejoin Now
Renew
  • Membership
  • Certification
    Certification

    Smiling asian student studying in library with laptop books doing online research for coursework, making notes for essay homework assignment, online education e-learning concept
    Get Certified!

    Be recognized as an HR leader with your SHRM-CP or SHRM-SCP credential.

    • How to Get Certified

      Demonstrate your ability to apply HR principles to real-life situations. No other HR certification compares.

      • How to Get Certified
      • Eligibility Criteria
      • Exam Details and Fees
      • SHRM-CP
      • SHRM-SCP
      • Which Certification is Best for Me
      • Certification FAQs
    • Prepare for the Exam

      Give yourself the best chance to pass your SHRM certification exam.

      • Exam Preparation
      • SHRM BASK
      • SHRM Learning System
      • Instructor-Led Learning
      • Self-Study
      • Study Aids & Add-ons
    • Recertification

      Recertify your SHRM Credentials before your end date!

      • Specialty Credentials
      • Qualifications
      Certification Portal
  • Topics & Tools
    Topics & Tools

    Stay up to date with workplace news and leverage our vast library of resources to streamline day-to-day HR tasks.

    The white house in washington, dc.
    Executive Order Impact Zone

    Do not abandon, but evaluate and evolve. It is about legal, equal opportunity for all.

    • News & Trends

      Follow breaking news and emerging workplace trends.

      Legal & Compliance

      Stay informed on workplace legal updates and their impacts.

      From the Workplace

      Explore diverse perspectives from your peers on today's workplaces.

      Flagships

      Get curated collections of podcasts, videos, articles, and more produced by SHRM.

    • HR Topics
      • AI in the Workplace
      • Civility at Work
      • Compensation & Benefits
      • Inclusion & Diversity
      • Talent Acquisition
      • Workplace Technology
      • Workplace Violence Prevention
      SEE ALL
      SHRM Research
    • Tools & Samples

      Access member resources and tools to streamline HR tasks.

      • Forms & Checklists
      • How-To Guides
      • Interactive Tools
      • Job Descriptions
      • Policies
      • Toolkits
      SEE ALL
      Ask an Advisor
  • Events & Education
    Events & Education

    SHRM25 in San Diego, June 29 - July 2, 2025
    Join us for SHRM25 in San Diego

    Register for the World’s Largest HR Conference being held on June 29 - July 2, 2025

    • Events
      • SHRM25
      • The AI+HI Project 2025
      • INCLUSION 2025
      • Talent 2026
      • Linkage Institute 2025
      SEE ALL
      Webinars
    • Educational Programs

      Designed and delivered by HR experts to empower you with the knowledge and tools you need to drive lasting change in the workplace.

      Specialty Credentials

      Demonstrate targeted competence and enhance credibility among peers and employers.

      Qualifications

      Gain a deeper understanding and develop critical skills.

    • Team Training & Development

      Customized training programs unique to your organization’s needs.

  • Business Solutions
  • Advocacy
    Advocacy

    Make your voice heard on public policy issues impacting the workplace.

    Advocacy
    SHRM's President & CEO testifies to Congress on "The State of American Education"
    • Policy Areas
      • Workforce Development
      • Workplace Inclusion
      • Workplace Flexibility & Leave
      • Workplace Governance
      • Workplace Health Care
      • Workplace Immigration
      State Affairs

      SHRM advances policy solutions in state legislatures nationwide.

      Global Policy

      SHRM is the go-to for global HR leaders and businesses on workplace matters.

    • Advocacy Team (A-Team)

      SHRM’s A-Team is a key member benefit, giving you the tools, insights, and opportunities to shape workplace policy and drive real impact.

      Take Action

      Urge lawmakers to support policies that create lasting, positive change.

      Advocacy & Legislative Resources

      Access SHRM’s curated policy materials and content.

    • SHRM-Led Coalitions
      • Generation Cares
      • The Section 127 Coalition
      • Learn More & Partner with SHRM Government Affairs
  • Community
    Community

    Woman raising hand in group
    Find a SHRM Chapter

    Easily find a local professional or student chapter in your area.

    • Chapters

      Find local connections from over 607 chapters and state councils and create your personalized HR network.

      SHRM Connect

      Post polls, get crowdsourced answers to your questions and network with other HR professionals online.

      SHRM Northern California

      Join SHRM members in the greater San Francisco Bay area for local events and networking.

    • Membership Councils

      Learn about SHRM's five regional councils and the Membership Advisory Council (MAC).

      • Membership Advisory Council
      • Regional Councils
    • Volunteers

      Learn about volunteer opportunities with SHRM.

      • Volunteer Leader Resource Center
Close
  • Membership
  • Certification
    back
    Certification
    Smiling asian student studying in library with laptop books doing online research for coursework, making notes for essay homework assignment, online education e-learning concept
    Get Certified!

    Be recognized as an HR leader with your SHRM-CP or SHRM-SCP credential.

    • How to Get Certified

      Demonstrate your ability to apply HR principles to real-life situations. No other HR certification compares.

      • How to Get Certified
      • Eligibility Criteria
      • Exam Details and Fees
      • SHRM-CP
      • SHRM-SCP
      • Which Certification is Best for Me
      • Certification FAQs
    • Prepare for the Exam

      Give yourself the best chance to pass your SHRM certification exam.

      • Exam Preparation
      • SHRM BASK
      • SHRM Learning System
      • Instructor-Led Learning
      • Self-Study
      • Study Aids & Add-ons
    • Recertification

      Recertify your SHRM Credentials before your end date!

      • Specialty Credentials
      • Qualifications
      Certification Portal
  • Topics & Tools
    back
    Topics & Tools

    Stay up to date with workplace news and leverage our vast library of resources to streamline day-to-day HR tasks.

    The white house in washington, dc.
    Executive Order Impact Zone

    Do not abandon, but evaluate and evolve. It is about legal, equal opportunity for all.

    • News & Trends

      Follow breaking news and emerging workplace trends.

      Legal & Compliance

      Stay informed on workplace legal updates and their impacts.

      From the Workplace

      Explore diverse perspectives from your peers on today's workplaces.

      Flagships

      Get curated collections of podcasts, videos, articles, and more produced by SHRM.

    • HR Topics
      • AI in the Workplace
      • Civility at Work
      • Compensation & Benefits
      • Inclusion & Diversity
      • Talent Acquisition
      • Workplace Technology
      • Workplace Violence Prevention
      SEE ALL
      SHRM Research
    • Tools & Samples

      Access member resources and tools to streamline HR tasks.

      • Forms & Checklists
      • How-To Guides
      • Interactive Tools
      • Job Descriptions
      • Policies
      • Toolkits
      SEE ALL
      Ask an Advisor
  • Events & Education
    back
    Events & Education
    SHRM25 in San Diego, June 29 - July 2, 2025
    Join us for SHRM25 in San Diego

    Register for the World’s Largest HR Conference being held on June 29 - July 2, 2025

    • Events
      • SHRM25
      • The AI+HI Project 2025
      • INCLUSION 2025
      • Talent 2026
      • Linkage Institute 2025
      SEE ALL
      Webinars
    • Educational Programs

      Designed and delivered by HR experts to empower you with the knowledge and tools you need to drive lasting change in the workplace.

      Specialty Credentials

      Demonstrate targeted competence and enhance credibility among peers and employers.

      Qualifications

      Gain a deeper understanding and develop critical skills.

    • Team Training & Development

      Customized training programs unique to your organization’s needs.

  • Business Solutions
  • Advocacy
    back
    Advocacy

    Make your voice heard on public policy issues impacting the workplace.

    Advocacy
    SHRM's President & CEO testifies to Congress on "The State of American Education"
    • Policy Areas
      • Workforce Development
      • Workplace Inclusion
      • Workplace Flexibility & Leave
      • Workplace Governance
      • Workplace Health Care
      • Workplace Immigration
      State Affairs

      SHRM advances policy solutions in state legislatures nationwide.

      Global Policy

      SHRM is the go-to for global HR leaders and businesses on workplace matters.

    • Advocacy Team (A-Team)

      SHRM’s A-Team is a key member benefit, giving you the tools, insights, and opportunities to shape workplace policy and drive real impact.

      Take Action

      Urge lawmakers to support policies that create lasting, positive change.

      Advocacy & Legislative Resources

      Access SHRM’s curated policy materials and content.

    • SHRM-Led Coalitions
      • Generation Cares
      • The Section 127 Coalition
      • Learn More & Partner with SHRM Government Affairs
  • Community
    back
    Community
    Woman raising hand in group
    Find a SHRM Chapter

    Easily find a local professional or student chapter in your area.

    • Chapters

      Find local connections from over 607 chapters and state councils and create your personalized HR network.

      SHRM Connect

      Post polls, get crowdsourced answers to your questions and network with other HR professionals online.

      SHRM Northern California

      Join SHRM members in the greater San Francisco Bay area for local events and networking.

    • Membership Councils

      Learn about SHRM's five regional councils and the Membership Advisory Council (MAC).

      • Membership Advisory Council
      • Regional Councils
    • Volunteers

      Learn about volunteer opportunities with SHRM.

      • Volunteer Leader Resource Center
Join Today
Renew
Rejoin Now
Renew
  • Store
    • Global
    • India
    • MENA
  • About
  • Book a Speaker
  • Foundation
  • Executive network
  • CEO Circle
  • SHRM Business
  • Linkage Logo
SHRM
Sign In
  • Account
    • My Account
    • Logout
Close

  1. Topics & Tools
  2. Employment Law & Compliance
  3. What Special Wage Rules Apply to Workers Who Customarily Receive Tips?
Share
  • Linked In
  • Facebook
  • Twitter
  • Email

Lorem ipsum dolor sit amet, consectetur adipiscing elit. Vivamus convallis sem tellus, vitae egestas felis vestibule ut.


Error message details.

Copy button
Reuse Permissions

Request permission to republish or redistribute SHRM content and materials.


Learn More
News

What Special Wage Rules Apply to Workers Who Customarily Receive Tips?

November 1, 2017 | Lisa Nagele-Piazza, J.D.




This is the third in a series of articles about wage and hour compliance. This article examines federal and state laws for tipped employees. Read the first part here and the second part here.

Wage and hour rules that apply to restaurant servers and other tipped workers are complicated and may leave HR professionals with many questions.

Can employers pay tipped workers less than the standard minimum wage, require workers to pool their tips, or deduct credit card transaction fees from charged tips? The answers may depend on state law.

Here are some pointers to help HR professionals comply with federal and state laws that cover tipped employees.

[SHRM members-only HR Q&A: Must a company pay tipped employees minimum wage for all hours taken as vacation time, or is it permissible to pay only the tip credit wage?]

Apply the Most Generous Rule

The federal Fair Labor Standards Act (FLSA) has rules that specifically apply to tipped workers, but state and local laws may be more generous. Employers should apply the most employee-favorable standard prevailing in a particular jurisdiction, said Ted Boehm, an attorney with Fisher Phillips in Atlanta.

That means multistate employers must decide between implementing several tip policies that mirror the patchwork of local, state and federal laws or implementing blanket nationwide policies that are based on the highest applicable standards, he noted.

"Among other things, state laws may differ from federal law when it comes to the lawfulness of tip credits, mandatory tip pools and credit card transaction fee deductions from employee tips," said Cheryl Orr, an attorney with Drinker Biddle in San Francisco.

She suggested that multistate employers consult with counsel to ensure that they are complying with the numerous restrictions imposed by federal and state laws.

Employer Tip Credits

Tipped employees are those who customarily receive more than $30 per month in tips, according to the U.S. Department of Labor's Wage and Hour Division. Under the FLSA, employers may pay tipped workers a cash wage of as little as $2.13 per hour—which is less than the current federal $7.25 minimum wage—as long as workers make up the $5.12 difference in gratuities.

Before taking advantage of the tip credit, employers must tell affected workers:

  • The dollar amount the employer is paying tipped employees (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).
  • That the tip credit the employer is claiming can't exceed the actual amount of tips an employee receives.
  • That all tips are to be retained by the employee unless there is a valid tip pool that is limited to employees who customarily receive tips.

The tip credit will not apply unless the employee has been told about these tip-credit provisions.

Orr noted that some state laws mirror the FLSA's tip credit requirements, while others impose different or more-stringent requirements. 

"There are a variety of ways in which compliance with the FLSA might differ from state law as it relates to taking the tip credit," Boehm said. The most obvious example is the cash wage that an employer must pay a tipped employee, as many states require an employer to pay a higher rate. He pointed to Florida as an example, which requires employers to pay a cash wage of $5.08 per hour and currently has a minimum wage of $8.10 per hour—though the state's minimum wage rates will rise in January 2018.

Other states, such as Massachusetts, Pennsylvania and Michigan also require employers to pay tipped employees a minimum cash wage that is greater than that required by the FLSA.

Orr noted that New York permits tip credits in various amounts based on industry and occupation. Alaska, California and Oregon prohibit tip credits altogether. 

"If state laws prohibit tip credits or provide for a higher maximum tip credit, state law controls," Orr said, adding that state laws also may provide different definitions of "tipped employees" and different notice requirements that employers must comply with before taking a tip credit. 

Credit Card Transaction Fees

Another complicated issue for employers with tipped staff is figuring out how to handle credit card transaction fees. Many customers now pay with credit cards instead of cash and so they also charge gratuities instead of leaving cash for tipped workers.

Credit card companies generally charge businesses a transaction fee of about 3 percent to 5 percent of the total bill. This means that when a customer leaves a $10 tip on a card, the business may have to pay at least 30 cents of that tip to the credit card company.

So can the employer deduct the charge and give the employee $9.70? "This typically depends upon the most employee-favorable standard prevailing in a particular jurisdiction," Boehm said. The DOL says that employers may reduce a credit card tip by the amount that is charged to the employer as a transaction fee, and some federal courts have embraced that position. 

Some states also permit such credit card transaction fee deductions, while others, such as California and Colorado, prohibit such deductions. Other states are silent on the issue. 

"Employers must not only determine if credit card deductions are permissible in the states in which they operate, but also ensure such deductions do not lead to minimum wage and/or tip credit violations," Orr said.

Mandatory Tip Pools

Hospitality businesses such as bars and restaurants may want workers to pool their tips to encourage team work and to balance shift earnings. But employers must follow strict rules if they require employees to share their tips.

Under the FLSA, employers may arrange a tip pool only for employees who customarily receive gratuities. This includes servers, bellhops, bussers and bartenders.

A valid tip pool may not include employees who don't regularly receive tips, such as dishwashers, cooks, chefs and janitors.

There are no limits on what percentage of workers' tips can be pooled, but the employer must:

  • Notify tipped workers of any required tip pool contribution amount.
  • Take a tip credit only for an amount equal to the tips each tipped employee actually receives.
  • Not retain any tips for any other purpose.

However, many details regarding valid tip-pool arrangements are up for debate. "In recent years there has been increased litigation over employer tip pooling arrangements," Boehm said. 

The DOL and some courts have said that "back of the house" employees such as dishwashers, cooks and chefs generally may not participate in tip pools under the FLSA. But some courts have held that those workers may share in the tip pool if the employer doesn't take the tip credit and opts instead to pay at least the standard minimum wage to all employees who share in the pool.

The DOL has also taken the position that owners, managers and supervisors can't share in a valid tip pool, Orr noted. "Conversely, some federal courts have held that, absent a tip credit, owners and managers are free to participate in mandatory tip pools."

Further complicating matters, the DOL has proposed a rule to rescind its current restrictions on tip pooling by employers that pay tipped workers the full minimum wage.

Not only is federal law unsettled, but state laws may provide different or more stringent requirements on tip pooling including who may lawfully participate, Orr added.

"This is a rapidly evolving area of the law, so employers should keep up-to-date on future developments," Boehm said.


This was the third in a three-part series of articles on wage and hour compliance. The first installment examined federal and state record-keeping requirements for nonexempt employees. The second segment discussed the differences between federal and state overtime laws. 

 

Was this article useful? SHRM offers thousands of tools, templates and other exclusive member benefits, including compliance updates, sample policies, HR expert advice, education discounts, a growing online member community and much more. Join/Renew Now and let SHRM help you work smarter.

Business Acumen
Compensation
Employment Law & Compliance
Tax Compliance

Related Articles

Kelly Dobbs Bunting speaks onstage at SHRM24
(opens in a new tab)
News
Why AI+HI Is Essential to Compliance

HR must always include human intelligence and oversight of AI in decision-making in hiring and firing, a legal expert said at SHRM24. She added that HR can ensure compliance by meeting the strictest AI standards, which will be in Colorado’s upcoming AI law.

(opens in a new tab)
News
A 4-Day Workweek? AI-Fueled Efficiencies Could Make It Happen

The proliferation of artificial intelligence in the workplace, and the ensuing expected increase in productivity and efficiency, could help usher in the four-day workweek, some experts predict.

(opens in a new tab)
News
How One Company Uses Digital Tools to Boost Employee Well-Being

Learn how Marsh McLennan successfully boosts staff well-being with digital tools, improving productivity and work satisfaction for more than 20,000 employees.

Workplace Compliance Newsletter

Summaries of legal decisions, legislative news and regulatory news, delivered Friday afternoons.

Success title

Success caption

Manage Subscriptions
  • About SHRM
  • Careers at SHRM
  • Press Room
  • Contact SHRM
  • Book a SHRM Executive Speaker
  • Advertise with Us
  • Partner with Us
  • Copyright & Permissions
  • Post a Job
  • Find an HR Job
Follow Us
  • LinkedIn
  • Facebook
  • Twitter
  • Instagram
  • YouTube
  • SHRM Newsletters
  • Ask An Advisor

© 2025 SHRM. All Rights Reserved

SHRM provides content as a service to its readers and members. It does not offer legal advice, and cannot guarantee the accuracy or suitability of its content for a particular purpose. Disclaimer


  1. Privacy Policy

  2. Terms of Use

  3. Accessibility

Join SHRM for Exclusive Access to Member Content

SHRM Members enjoy unlimited access to articles and exclusive member resources.

Already a member?
Free Article
Limit Reached

Get unlimited access to articles and member-exclusive resources.

You've reached the limit of 1 free article this month. Join to access unlimited articles and member-only resources.

Already a member?
Free Article
Exclusive Executive-Level Content

This content is for the SHRM Executive Network and Executive Content Subscription members only.

You've reached the limit of 1 free article this month. Join the Executive Network and enjoy unlimited content.

Already a member?
Free Article
Exclusive Executive-Level Content

This content is for the SHRM Executive Network and Executive Content Subscription members only.

You've reached the limit of 1 free article this month. Join and enjoy unlimited access to SHRM Executive Network Content.

Already a member?
Unlock Your Career with SHRM Membership

Please enjoy this free resource! Join SHRM for unlimited access to exclusive articles and tools.

Already a member?

Your membership is almost expired! Renew today for unlimited access to member content.

Renew now

Your membership has expired. Renew today for unlimited access to member content.

Renew Now

Your Executive Network membership is nearing its expiration. Renew now to maintain access.

Renew Now

Your membership has expired. Renew your Executive Network benefits today.

Renew Now