Tip Credit

A provision in federal and many state wage laws that allows employers to pay tipped workers a lower base wage, with tips expected to make up the difference to at least minimum wage.

The tip credit is a federal FLSA provision that lets employers of tipped employees pay a base cash wage as low as $2.13/hour — as long as tips bring total hourly compensation up to at least the federal minimum wage of $7.25/hour. If tips don't cover the gap in a given pay period, the employer must make up the difference. The $2.13 federal tipped minimum wage has been unchanged since 1991, making it one of the most politically contentious wage policies in the U.S.

State laws vary significantly: seven states (California, Oregon, Washington, Minnesota, Montana, Alaska, Nevada) require tipped workers to be paid the full state minimum wage before tips — eliminating the tip credit entirely. Most other states follow the federal model or set their own tipped minimums above $2.13. The trend in many cities and states is toward eliminating the tip credit, which research suggests reduces the gender wage gap in the restaurant industry.

The employer's obligation under the tip credit is conditional: they must inform employees of the tip credit arrangement, employees must retain all their tips (except in valid tip pools), and if tips don't bring total compensation to the minimum wage in any workweek, the employer must pay the shortfall. Violations are common. The most frequent abuses: managers taking a share of tips, invalid tip pool structures that include non-tipped employees, and employers failing to make up the shortfall when slow shifts produce below-minimum earnings.

The tipping system's interaction with base wages creates an unusual dynamic around service quality and pay stability. In tip credit states, tipped workers bear more income volatility — a slow January week means genuinely lower income, not just lower tips. This creates financial instability that research links to higher rates of wage theft complaints and lower overall earnings for tipped workers compared to states without the tip credit. The elimination of the tip credit in several states hasn't produced the service quality decline that opponents predicted, which has softened political resistance to further elimination.

States With No Tip Credit

  • California, Oregon, Washington, Alaska, Montana, Minnesota, and Nevada require full minimum wage before tips.
  • In these states, tips are entirely additional income on top of the full minimum wage.
  • Many cities within tip-credit states (like Chicago and NYC) have eliminated it locally.
  • Research in tip-credit-free states shows higher base earnings for tipped workers and no significant service quality decline.
  • The movement to eliminate the tip credit nationally — the One Fair Wage campaign — has succeeded in several jurisdictions and is active in others.

Your Rights as a Tipped Employee

  • Your employer must inform you in advance of the tip credit arrangement — they cannot apply it retroactively.
  • You must retain all your tips except in a valid tip pool that includes only employees who customarily receive tips.
  • Managers, supervisors, and owners cannot participate in tip pools — doing so is an FLSA violation.
  • If your tips plus base wage don't reach minimum wage in any workweek, your employer must make up the difference.
  • Service charges (automatically added to bills) are not tips — they belong to the employer and don't count toward the tip credit.

Example

A server in Texas earns $2.13/hour in base wages. In a slow Tuesday shift, she earns $12 in tips over 4 hours — $3/hour in tips plus $2.13 base = $5.13/hour, below federal minimum. Her employer is required to pay her the $2.12/hour shortfall to bring her to $7.25. In practice, many employers fail to track and make up these shortfalls — a common FLSA violation.