Federal Tip Credit and Tip Pooling Basics

The Fair Labor Standards Act (FLSA) outlines federal tip credit and tip pooling provisions.

What is tip credit and tip pooling under Federal Law?

  • Under a valid tip credit policy, employers are able to pay tipped employees an hourly rate that is less than minimum wage – provided that the tipped employee’s hourly wage plus tips equals or exceeds the required minimum wage.
  • A tip pooling agreement requires tipped employees to deposit a portion of their customer tips into a common “tip pool” to be shared with other employees. A valid Tip Pooling arrangement must meet all the requirements of the FLSA provisions (and any state requirements) for tipped employees.

For the most part, payment provisions for tipped employees have not changed on a federal level.

  • The FLSA defines a tipped employee as an employee who customarily and regularly receives $30 or more in tips per month.
  • The Federal minimum tip credit wage was set at $2.13 in 1991 and that has not changed (although many States have raised their tip credit wage).

In 2017 and 2018, the Department of Labor (DOL) made some clarifications and changes may affect how your tipped employees are paid.

In 2017, Omnibus Budget Bill made two important changes.

  • It is now unlawful for employers, including managers and supervisors, to keep any portion of tips received by their employees, regardless of whether or not the employer takes a tip credit.
  • Employers are now allowed to require tipped employees to share their tips with back of house employees or non-tipped employees such as dishwashers and cooks when the employer does not take a tip credit.
    • However, managers, supervisors, and owners may not participate in any tip pool, even if such individuals provide direct service to customers.
  • See more: FLSA Requirements for Tip Pooling Quietly Changed

In 2018 the DOL provided Guidance with a new Field Assistance Bulletin and an Opinion Letter:

State or regional laws may override these provisions and be more stringent when they are favorable toward the employee. Always speak with a Human Resources Professional if there is any question as to which law would apply.

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