Explaining Tip Credits

It is fairly common knowledge that the current federal minimum wage is $7.25, which has remained unchanged since 2009. Some states and large cities have higher minimum wages (Seattle currently holds the nation’s top spot at $15.45), but Texas is not one of them. The state follows the federal minimum rate. For tipped employees, though, the minimum wage becomes a little more complicated. This blog will take a look at how tipped employees are paid and when they are obligated to give up their earned tips. 

Existing Tip Credits Law

The Fair Labor Standards Act (The Federal law governing overtime and minimum wage for most workers) allows employers of customarily tipped employees to count tips their workers receive as part of the federally mandated minimum wage. Employers can claim up to $5.12 of customer tips per hour (known as a “tip credit”) to reach the $7.25 minimum wage. This is why you hear of tipped employees saying that they are only paid $2.13 per hour. However, if the tips are not sufficient to raise the wage to the $7.25 minimum, the employer remains responsible for the shortfall – tipped employees should be getting at least $7.25 per hour whether from tips or the employer. Of course, many tipped employees make more than $7.25 per hour with their tips. However, the recent stay-at-home orders and social distancing coming from the COVID-19 pandemic has magnified the sometimes precarious financial positions of restaurant workers and other tipped employees. 

However, employers sometimes ask their tipped employees to engage in work that doesn’t generate tips.  Although in the past there were some fairly clear rules, recent changes have made it less clear when a tipped worker is being forced to work in non-tipped work, and thus should be paid more than $2.13 per hour.  It can be valuable for a worker who is being required to do significant non-tipped work to discuss the specifics with an attorney.

Tip Pooling

A common practice in restaurants is to institute what’s called a “tip pool” in order to compensate other employees. For example, servers at a restaurant will often be required to hand over a portion of their tips they make during a shift to bussers or food runners. Employers are required to notify employees ahead of time of this arrangement. Historically, “back of house” staff like cooks and dishwashers were not eligible to participate in the tip pool with “front of house” staff like servers. New rules permit some tip pooling with more staff, if certain requirements are met. However, managers and owners are almost never permitted to share in a tip pool. An employer whose tip pool includes people it shouldn’t runs the risk of losing the right to claim the $5.12 tip credit against their minimum wage obligations. Thus, the employees paid a tip could be entitled to up to $5.12 per hour worked in unpaid wages on top of any tips they already received.


Being a tipped employee can sometimes feel unfair. Hopefully, you make enough tips to cover the minimum wage and much more. If you feel like your employer is making you do a large amount of work that seems unrelated to the work that actually gets you tips or you are required to share tips with people who don’t think you should, give Wyly & Cook a call at 713-236-8330 to see if you have a valid wage claim.

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Wyly & Cook, PLLC

The team at Wyly & Cook, PLLC brings a diverse body of trial and litigation experience to the table, putting us in a unique position to help clients with a wide range of legal issues.

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