What You Need to Know About Federal Tip Laws

Many employees receive tips as part of their pay. A tip typically is paid to a service worker, and it can be given in cash or by credit or debit card. Understanding federal tip laws is vital for all employers working in industries where tipping is commonplace. Explore our guide to the Fair Labor Standards Act (FLSA) and what’s covered in regard to tipped employees.

Tip Regulations Under the FLSA

Under the Fair Labor Standards Act (FLSA), tips are subject to specific regulations. Employers who meet certain requirements may apply a partial credit, known as the tip credit, toward their minimum wage obligations for tipped employees. Tipped employees are those who customarily and regularly receive tips as part of their job.

The tip credit was established by Congress in 1966 and later modified with the implementation of the 2021 Dual Jobs Final Rule on December 28, 2021. However, in October 2024, a federal court vacated portions of this rule, effectively reinstating the original dual jobs regulation (29 C.F.R.531.56(e). This regulation acknowledges that employees can perform both tipped and non-tipped duties, but employers may only apply the tip credit to hours worked in the tipped role.

According to the FLSA, tipped employees must receive a minimum cash wage of $2.13 per hour. The tip credit represents the difference between the direct (or cash) wage paid to the employee and the federal minimum wage. Only the tips actually received by the employee are considered when determining tipped employee status and applying the credit.

Additionally, the FLSA allows for tip pooling or sharing among eligible employees. While it permits such arrangements, it does not set limits on the amount or percentage each employee may contribute to a valid tip pool.

Recent Changes for Tipped Employees

In 2020 and 2021, significant changes occurred around the tip laws. The first, known as the 2020 Tip Rule, restricted employers from keeping employee tips under any circumstances. It also outlined that employers not taking the tip credit are allowed to include non-tipped employees (such as dishwashers or cooks) to participate in tip pools.

The 2021 Civil Money Penalty Rule modified two parts of the 2020 Tip Rule that pertained to supervisors and managers. It restored the ability to assess civil money penalties to employers found in violation of the tip law. The updated rule also clarified that supervisors and managers are permitted to contribute to tip pools as long as they don’t receive any from them, and that they can keep tips received directly from customers for services rendered by a supervisory or managerial role.

Federal vs. State Law

Although the FLSA serves as the federal regulation for tipped employees, many states, cities, and municipalities have enacted differing legislation. According to the U.S. Department of Labor, an employer must comply with whichever law offers more protection to employees.

In our HR Laws & Regulations resource center, you can find state-specific guidance for all 50 states and the District of Columbia. Review the requirements in your state to ensure compliance.

Tip Laws by State

Managing the regulations associated with tips can be a challenge for employers in the hospitality, food and beverage, transportation, entertainment, and personal services industries. But with WorkforceHub, your business can ensure accuracy. The numerical clock prompt feature allows the employee to input their received tips at the end of the shift, and that information would be available for reporting and payroll processing. Explore our selection of time clocks to find what works for your business.