Labor: The benefits and obstacles to a valid tip pooling arrangement

Understand the legalities of the "tip credit"

Pursuant to 29 U.S.C. § 203(m), employers in states that permit tip credits may pay less than the minimum wage to employees who receive tips. This is known as a “tip credit.” Under the tip credit rule, the restaurant employer takes credit for the employee’s tips to make up the difference between the reduced wage paid by the employer and the legal minimum wage. Currently, the federal minimum hourly wage for nontipped employees is $7.25. The federal tipped employee minimum wage is $2.15. 

The tip credit may be taken only toward the wages of employees who qualify as “tipped employees,” who are defined as “any employee engaged in an occupation in which he customarily and regularly receives more than $30 a month in tips.” 29 U.S.C. § 203(t). The tip credit is not permitted in Alaska, California, Minnesota, Montana, Nevada, Oregon and Washington. In some states, a tip credit is allowed, but the wage rate differs from the federal minimum rate. For example, Michigan uses a tipped minimum rate of $2.65, and Pennsylvania uses $2.83.

Contributing Author

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Cheryl Wilke

Cheryl Wilke is a partner in the Ft. Lauderdale office of Hinshaw & Culbertson and focuses her practice in the representation of employers in...

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