What is a tip credit?
A tip credit is the amount, set by federal or state law, that an employer is allowed to count from a tipped worker's tips toward the minimum wage owed. Under federal FLSA section 3(m), an employer may pay a tipped employee a cash wage of $2.13 per hour and take a tip credit of up to $5.12 per hour, provided the combined wage averages at least $7.25 per hour over the workweek and the employee qualifies as a "tipped employee" (more than $30 per month in tips).[FLSA 3(m)][DOL FS-15]
When tips do not reach the threshold
If the combined wage in a workweek falls below the applicable minimum, the employer must make up the difference. Tipped employees must keep their tips except when participating in a valid tip pool with other customarily-tipped employees under 29 U.S.C. 203(m)(2)(A). Managers and supervisors are prohibited from sharing in tip pools.
The 80/20/30 dual-jobs rule
The 2021 DOL final rule (29 CFR 531.56) restored the 80/20 framework: a tipped employee performing non-tip-producing work for more than 20 percent of the workweek must be paid the full minimum wage for the excess. The 2021 rule also added the 30-minute rule: any continuous block of non-tip-producing work longer than 30 minutes must be paid at the full minimum. A 2024 Fifth Circuit decision (Restaurant Law Center v. DOL) vacated portions of the rule for employers in that circuit, but the rule remains in effect elsewhere.
States that ban the tip credit
Seven states require the full state minimum wage to be paid in cash before any tips:
- AK Alaska($13.00 full cash wage)
- CA California($16.50 full cash wage)
- MN Minnesota($11.13 full cash wage)
- MT Montana($10.85 full cash wage)
- NV Nevada($12.00 full cash wage)
- OR Oregon($15.05 full cash wage)
- WA Washington($16.66 full cash wage)
See /topics/no-tip-credit-states for the legislative history of each ban and tip-pool rules.