Tip Credit, Tip Pools, and Off-the-Clock Work: What Tipped Employees Need to Know

Federal law allows restaurants, bars, and other hospitality employers to pay tipped employees as little as $2.13 per hour in cash wages — a rate that has not changed since 1991. But that reduced cash wage comes with strict conditions. When employers fail to meet those conditions, they forfeit the right to pay the lower rate entirely. Servers, bartenders, and other tipped workers who have experienced tip pooling with managers, off-the-clock work, or inadequate notice of the tip credit arrangement may be owed significant back wages.

The FLSA's tip credit provision allows an employer to apply a portion of an employee's tips toward the federal minimum wage obligation. To lawfully take a tip credit, the employer must satisfy specific requirements: the employee must be informed of the tip credit arrangement before it is applied; tips must be retained by the employees who earned them, except as part of a valid tip pool; the employee's tips combined with the cash wage must equal at least the full federal minimum wage of $7.25 per hour for every hour worked; and the employee must work in a job that customarily and regularly receives tips. If any of these conditions is not met, the employer forfeits the tip credit and owes the full minimum wage for every hour worked — in addition to any tips the employee already received.

Tip pooling arrangements are legal only when they comply with the FLSA. Employers who take a tip credit may include only employees who customarily and regularly receive tips in a tip pool — typically front-of-house staff like servers, bartenders, and bussers. Back-of-house employees, such as cooks and dishwashers, may not be included when the employer is taking the tip credit. Managers and supervisors may never participate in a tip pool, regardless of whether the employer takes a tip credit or not. When management receives a share of server or bartender tips — whether through a mandatory tip pool or informally — the tip credit is forfeit, and employees are entitled to the full minimum wage for all hours worked.

Tipped employees who spend significant time performing tasks that do not produce tips may also have claims. When an employee is effectively working two distinct jobs — one tipped and one not — the employer can take the tip credit only for time spent in tipped work. Courts and the Department of Labor have addressed situations where servers spend excessive time performing non-tipped tasks such as cleaning, prep work, or stocking while being paid the tipped minimum wage. Hours spent on these tasks may not be subject to the tip credit, meaning the employer owes the full minimum wage for that time.

Off-the-clock work is particularly harmful for tipped employees because it is often performed at the $2.13 cash wage — or without any compensation at all. Common examples include requiring servers to arrive early for pre-shift meetings before clocking in, requiring bartenders to complete side work after their last table without compensation, and requiring employees to finish cleaning or closing duties after clocking out. Each hour of uncompensated time may represent a minimum wage violation if the worker's total compensation for the workweek — tips plus cash wages — divided by total hours worked falls below $7.25.