Summary
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Tipping laws vary by state, and HR professionals need to navigate the specific requirements to ensure compliance. — More
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Employers can choose from different tip policies, such as tip splitting, tip sharing, or tip pooling, to establish the fair distribution of tips among employees.
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Payroll software streamlines tip calculations, simplifying the process for employers and ensuring accurate and fair tip distribution.
In the United States, tipping has become deeply ingrained in our culture, more so than in many other countries. Michael Lynn, a professor of consumer behavior and marketing at the Cornell University School of Hotel Administration, told NBC the US is “the most tip-happy country.” In many other countries, leaving a small tip is optional and extra, but tipping in the US holds a far more substantial role. The livelihood of employees in certain sectors depends on gratuities as they are baked into their hourly wages.
For HR professionals, managing a workforce in a tipped industry presents unique challenges. Ensuring compliance with the specific laws governing how these employees should be paid is a delicate task. Understanding the intricacies of tipping laws is crucial to avoiding potential legal pitfalls and ensuring fair compensation for employees.
Adding to the complexity is the interaction of tipping with overtime regulations. Determining the proper calculation of overtime pay for tipped employees requires a nuanced understanding of the rules and regulations. Failure to comply with these guidelines can result in costly legal consequences for businesses.
This guide will break down all federal and state tipping laws to help you navigate the intricate landscape of gratuity regulations.
Click here to jump to a table outlining each state’s minimum wage laws for tipped employees.
What is the US tipping law?
According to the IRS, tips are discretionary payments made by customers to employees. This includes cash tips received directly, tips left through electronic settlement or payment methods, the value of noncash tips, and tip amounts received through tip pooling or tip-sharing arrangements.
The Department of Labor (DOL) defines a tipped employee as “any employee working in an occupation in which he or she regularly receives more than $30 a month in tips.” Examples of tipped employees include servers, bartenders, hotel staff, valets, and other service-industry workers who rely on tips as a significant part of their income.
Tipped employees receive a special form of hourly wage known as a tipped wage. The tipped wage is a lower direct wage (known as “tip credit”) paid by employers to tipped employees, with the expectation that the employee’s tips will supplement their earnings and meet or exceed the federal minimum wage requirement.
According to the DOL, federal law states that employers of tipped employees are required to pay a direct wage of $2.13 per hour as long as the combined amount of tips and the direct wage equals or exceeds the federal minimum wage. However, many states have higher direct wage requirements for tipped employees that employers must adhere to.
Consider a restaurant server who receives a direct wage of $2.13 per hour and earns an average of $20 per hour in tips. To determine compliance with the law, we calculate the total hourly earnings by adding the direct wage and tips:
Direct Wage: $2.13 per hour
Tips: $20 per hour
Total Hourly Earnings: $2.13 + $20 = $22.13
In this scenario, the server’s tips of $20 per hour ensure compliance with the law. Since the total hourly earnings ($22.13) exceed the federal minimum wage requirement, which is currently set at $7.25 per hour, the server is receiving appropriate compensation.
Tipping laws by state
While federal law sets the groundwork for tipping regulations in the United States, it is important to note that individual states have the authority to establish their own tipping laws. These state-level variations can significantly impact the requirements and practices surrounding tipping in different parts of the country.
To gain a comprehensive understanding of tipping laws in each state, we have provided detailed tables below that break down the regulations. These tables will help you navigate the specific requirements for maximum tip credits and minimum cash wages in each state.
But first, let’s define two key terms that play a crucial role in understanding tipping laws.
Maximum tip credit: The maximum tip credit refers to the amount that employers are allowed to offset the minimum wage requirement by considering the tips received by their employees. This credit can vary from state to state, and understanding the specific maximum tip credit in each jurisdiction is essential for employers and employees alike.
Minimum cash wage: The minimum cash wage represents the lowest hourly rate that employers must pay to tipped employees directly, regardless of the tips they receive. While some states align the minimum cash wage with the federal standard, others have established higher cash wage requirements to ensure fair compensation for tipped workers.
To explore the specific tipping laws in your area in more detail, click on the link provided for each state.
| State | Minimum cash wage | Maximum tip credit | Total tipped minimum wage rate |
| Alabama** | $2.13 | $5.12 | $7.25 |
| Alaska | $11.91 | – | $11.91 |
| Arizona | $11.70 | $3.00 | $14.70 |
| Arkansas | $2.63 | $8.37 | $11.00 |
| California | $16.50 | – | $16.50 |
| Colorado | $11.79 | $3.02 | $14.81 |
| Connecticut***** | $16.35 | $16.35 | |
| Delaware | $2.23 | $12.27 | $15.00 |
| Florida * | $9.98 | $3.02 | $13.00 |
| Georgia ** | $2.13 | $5.12 | $7.25 |
| Hawaii *** | $12.75 | $1.25 | $14.00 |
| Idaho | $3.35 | $3.90 | $7.25 |
| Illinois | $9 | 40% of the applicable minimum wage ($6) | $14.00 |
| Indiana | $2.13 | $5.12 | $7.25 |
| Iowa | $4.35 | 40% of the applicable minimum wage ($2.90) | $7.25 |
| Kansas**** | $2.13 | $5.12 | $7.25 |
| Kentucky | $2.13 | $5.12 | $7.25 |
| Louisiana** | $2.13 | $5.12 | $7.25 |
| Maine | $7.33 | 50% of the applicable minimum wage ($7.32) | $14.65 |
| Maryland | $3.63 | $11.37 | $15 |
| Massachusetts | $6.75 | $8.25 | $15 |
| Michigan | 38% of the applicable minimum wage ($4.01) | $6.55 | $10.56 |
| Minnesota | $11.13 | – | $11.13 |
| Mississippi** | $2.13 | $5.12 | $7.25 |
| Missouri | $6.88 | 50% of the applicable minimum wage ($6.87) | $13.75 |
|
Businesses with gross annual sales over $110,000 Businesses not covered by FLSA standards with gross annual sales of $110,000 or less |
$10.55 $4 |
– |
$10.55 $4 |
| Nebraska | $2.13 | $11.37 | $13.50 |
| Nevada**** | $12 | – | $12 |
| New Hampshire | $3.27 | $3.98 | $7.25 |
| New Jersey | $5.26 | $9.87 | $15.49 |
| New Mexico | $3 | $9 | $12 |
| New York | – | Maximum tip credit varies by region. Consult New York’s Minimum Wage Overview for more information. | $15 |
| North Carolina | $2.13 | $5.12 | $7.25 |
| North Dakota | $4.86 | 33% of the applicable minimum wage ($2.39) | $7.25 |
| Ohio | $5.35 | $5.35 | $10.70 |
| Oklahoma**** | $2.13 | $5.12 | $7.25 |
| Oregon | $14.70 – for exceptions in the Portland Metro and non-urban counties, check Oregon’s Minimum wage increase schedule | – | $14.70 |
| Pennsylvania | $2.83 | $4.42 | $7.25 |
| Rhode Island | $3.89 | $11.11 | $15.00 |
| South Carolina** | $2.13 | $5.12 | $7.25 |
| South Dakota | $5.75 | 50% of the applicable minimum wage ($5.75) | $11.50 |
| Tennessee** | $2.13 | $5.12 | $7.25 |
| Texas**** | $2.13 | $5.12 | $7.25 |
| Utah**** | $2.13 | $5.12 | $7.25 |
| Vermont | $7 | $7.01 | $14.01 |
| Virginia | $2.13 | $10.28 | $12.41 |
| Washington | $16.66 | – | $16.66 |
| West Virginia | $2.62 | 70% of the applicable minimum wage ($6.13) | $8.75 |
| Wisconsin | $2.33 | $4.92 | $7.25 |
| Wyoming | $2.13 | $5.12 | $7.25 |
*Florida — The minimum wage is scheduled to increase by $1.00 every year on September 30th until it reaches $15.00 on September 30, 2026.
**Alabama, Louisiana, Mississippi, South Carolina, and Tennessee have no state minimum wage laws. Georgia has a state minimum wage law; however, it does not extend to tipped employees.
***Hawaii — “The combined amount the employee receives from the employer and in tips must be at least $7.00 more than the applicable minimum wage.” (Source)
****In Kansas, Oklahoma, Texas, and Utah, employees subject to the FLSA are excluded from state minimum wage laws. Employers must ensure these employees are paid at least the federal minimum wage of $7.25 per hour.
*****In Connecticut, employers can take a tip credit for bar and hotel employees. For restaurant and hotel wait staff, employers must at least pay $6,38 and may take a maximum tip credit of $9.97. Meanwhile, they should pay at least $8.23 and can take a maximum tip credit of $8.12 for bartenders who normally receive tips.
What tipping model should my business follow?
Implementing a tip policy is an important consideration for employers as it establishes guidelines on how tips are distributed among employees and can contribute to a fair and harmonious work environment. When it comes to tip policies, there are various models that businesses can adopt, each with its own implications and considerations.
One common approach is the “everyone keeps their tips” policy, where each employee retains the tips they earn at the end of their shift. While this policy appears straightforward, it can raise concerns about fairness. In a restaurant setting, for example, only customer-facing staff, such as waitstaff and bar staff, receive tips under this policy. Essential back-of-house employees like dishwashers and bussers are left without tips. This can create a disparity, potentially leading to a shortage of back-of-house employees who do not benefit from additional tips.
Another approach is tip splitting or tip sharing, where tips are divided among both tipped and non-tipped employees based on hours worked or predetermined percentages. Tip sharing is usually voluntary, without specific legal guidelines. This policy ensures that all employees have the opportunity to receive tips, fostering a more equitable environment.
Tip splitting can be complex from a payroll perspective when calculating employee wages. Employers must ensure that non-tipped employees receive at least the minimum wage, including their share of tips (which are also subject to taxation). Additionally, the proper application of tip credits to the wages of tipped employees is crucial. It is important to maintain fairness and ensure that non-tipped employees do not out-earn their tipped counterparts due to tip credit rules.
Tip pooling is another option involving the collection of tips earned during a shift and their equitable distribution among both front-of-house and back-of-house staff. Under the Fair Labor Standards Act (FLSA), if tips are shared with non-tipped staff, employers must pay the full minimum wage without applying tip credits. While tip pooling promotes fairness by providing all employees with a consistent hourly wage and shared tips, it may not be a viable solution during slower periods when tips are scarce.
Ultimately, the tipping model your business chooses should align with your company’s values, industry standards, and the preferences of your service employees. Consider the dynamics of your workforce, the potential impact on employee morale, and the legal requirements specific to your jurisdiction when determining the most suitable tip policy for your organization.
Streamline tip calculations with Workforce.com
No matter which tipping policy you choose to adopt, handling tip calculations can be a daunting task. The good news is that Workforce.com can be a valuable ally in simplifying this process. By seamlessly integrating with your POS system, you can customize the percentage of tips to be shared via a “tip jar” feature and automatically ensure that your employees receive their rightful earnings based on their hours worked.
If you’re interested in discovering how proper time and attendance tracking and payroll processing can revolutionize your tip management, reach out to us today. We’d be delighted to guide you through the process.
This information is for general purposes only and should not be considered legal advice. While we strive to keep it updated, laws and regulations can change at any time. It’s always a good idea to consult with a legal professional or relevant authorities to compliance with the most current standards.
