Tip Credit and Tip Pooling Provisions of the Fair Labor Standards Act
June 27, 2018
Tip Credit and Tip Pooling Provisions of the Fair Labor
Standards Act
Introduction
maximum tip credit is $5.12 per hour, which means
The Fair Labor Standards Act (FLSA), enacted in 1938
employers may take a credit of up to 71% of their
(P.L. 75-718), is the federal legislation that establishes the
required obligation to pay a minimum wage. A higher
general minimum wage that must be paid to all covered
tip credit means that an employer may count more in
workers. At present, the vast majority of workers are
tips toward the employer liability for the minimum
covered by the minimum wage provisions of the FLSA.
wage. A lower tip credit means that an employer must
These provisions have been amended numerous times since
provide a greater share of an employee’s compensation
1938, typically for the purpose of expanding coverage or
in direct cash wages. No tip credit means that an
raising the wage rate. The most recent change was enacted
employer must pay direct cash wages equal to the
in 2007 (P.L. 110-28) to increase the minimum wage to
prevailing minimum wage and the tipped worker does
$7.25 per hour by July 2009.
not have to credit any tip income toward the total
minimum wage.
Tipped Employees under the FLSA
Employees are covered by the minimum wage and overtime
Thus, the existence of a tip credit means that the two
provisions of the FLSA unless they are specifically
components of the minimum wage for tipped workers—the
exempted. The act allows employers of certain groups of
employer cash wage and tips—must equal the required
employees to pay less than the statutory minimum wage. In
minimum wage. The tip credit does not create a
the case of employees who regularly earn tips as part of
subminimum wage from the standpoint of a tipped worker
their work, two provisions of the FLSA—tip credit and tip
but it changes the composition of earnings from solely
pooling—permit a different pay structure than applies to
employer-paid to a combination of employer wages and
non-tipped workers.
tips. The exact mix of those two earnings components
depends on the prevailing minimum wage, the tip credit
FLSA Tip Credit Provisions
allowance, and the amount received in tips.
As part of the 1966 amendments to the FLSA that expanded
minimum wage coverage to include restaurant and hotel
The size of the tip credit has changed over time. Prior to
employees (P.L. 89-601), Congress added a tip credit
1996, the amounts for the minimum employer cash wage
provision to the minimum wage provisions. Under Section
and tip credit were set as a percentage of the federal
203(m) of the FLSA, a “tipped employee”—a worker who
minimum wage, ranging from 40% to 55%. That is, during
customarily and regularly receives more than $30 a month
the 30-year period from 1966 to 1996, employers of tipped
in tips—may have his or her cash wage from an employer
employees could take a credit from tip earnings of between
reduced, as long as the combination of wages from the
40% and 55% of the minimum wage against their liability
employer and tips equals the federal minimum wage. That
to provide the minimum wage to their employees. The 1996
is, the “credit” is the amount from employee tips that an
FLSA amendments (P.L. 104-188) set the employer’s
employer may count against its liability for the required
statutory minimum cash wage at $2.13 per hour (rather than
payment of the full federal minimum wage.
a percentage of the minimum wage) and the size of the tip
credit became dependent on the value of the minimum
Tip Credit Components
wage (i.e., the tip credit after 1996 equals the minimum
The FLSA tip credit provisions are comprised of two
wage minus $2.13).
components—“the employer cash wage” and the “tip
credit.”
FLSA Tip Pooling Provisions
Prior to 1974, the pooling or sharing of tips was not
The employer cash wage is the minimum amount that an addressed in the FLSA and was typically a matter worked
employer is required to pay a tipped worker. Currently,
out between employees and an employer. Congress
the FLSA sets this at $2.13 per hour, which is 29% of
amended the tip credit provisions of the FLSA in 1974 (P.L.
the current federal minimum wage of $7.25 per hour. An
93-259) to clarify that the tip credit may only be used to
employer of a tipped employee, just like an employer of
satisfy the minimum wage requirement if the tipped
any FLSA-covered employee, is ultimately responsible
employee retains all tips received, except that this provision
for payment of the full minimum wage to that employee.
did not “prohibit the pooling of tips among employees who
customarily and regularly receive tips.” Stated differently,
The tip credit is the amount of earnings from tips that an
the 1974 amendments provided that tipped employees must
employer may count against its liability for the full
be allowed to keep 100% of their tips, but could be required
minimum wage. Under current law, and at the current
to participate in mandatory (i.e., employer-imposed) tip
federal minimum wage rate of $7.25 per hour, the
pools among tipped workers only. A tip pool was
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considered valid only if it was limited to tipped employees.
Table 1. Participation in Tip Pooling under the FLSA
Voluntary (i.e., employee-determined) tip pools were
permissible in any instance and could include both tipped
Employer’s Use of Tip Credit
and non-tipped employees. The FLSA does not address
limits on tip pool contributions from employees, and the
Employee
Tip Credit
No Tip Credit
Department of Labor’s (DOL’s) past attempts to set
Tipped
Yes
Yes
maximum tip pool contribution percentages have been
prohibited due to a lack of statutory authority.
Non-Tipped
No
Yes
DOL’s 2011 Rule on Tip Pooling
Source: CRS analysis of P.L. 115-141, and Bryan L. Jarrett, Field
Assistance Bul etin No. 2018-3, U.S. Department of Labor, Wage and
In 2011, DOL issued new regulations that addressed tip
Hour Division, Washington, DC, April 6, 2018.
pooling, codifying three main provisions: (1) tips belong to
employees receiving the tips; (2) the only permissible
Interaction with State Laws
employer uses of employee tips are for the tip credit
Because several states have minimum wage rates that are
allowed by the FLSA or a valid tip pool (i.e., tipped
different (mostly higher) than the federal minimum wage
employees only); and (3) even if an employer pays the full
and different tip credit and tip pooling provisions, the
federal minimum cash wage and does not utilize the tip
impact of changing federal tip credit and pooling provisions
credit, the employer could not require tip pools that
would vary across states.
included non-tipped workers. In other words, the provisions
in the 2011 rule specify that in no instance may employers
Tip Credit
mandate a tip pool that involves non-tipped employees.
In general, where there are conflicting minimum wage
DOL’s 2017 Proposed Rule on Tip Pooling
provisions, the higher standard (e.g., higher wage rate)
prevails. That is, where the minimum wage or tip credit
In 2017, DOL issued a Notice of Promised Rulemaking
provisions are more beneficial to employees, they prevail.
(NPRM) indicating its intent to change portions of the 2011
As of 2018
rule. Specifically, the 2017 NPRM would maintain the
permissible uses of employee tips—a tip credit against the
seven states—Alaska, California, Minnesota, Montana,
minimum wage obligation and valid tip pools. However, the
Nevada, Oregon, and Washington—do not allow a tip
2017 NPRM would permit the reallocation of pooled tips to
credit; employers must pay the full statutory state or
both tipped and non-tipped workers in cases in which the
federal minimum wage (whichever is higher);
employer paid at least the full federal minimum cash wage
rather than using the tip credit provisions. The NPRM did
26 states and the District of Columbia require a
not specify which non-tipped employees would be eligible
minimum employer cash wage that is greater than the
for participation in tip pools. A final rule based on the
federal rate of $2.13 per hour; and
NPRM has not yet been issued.
The Consolidated Appropriations Act, 2018
17 states require a minimum employer cash wage of
$2.13 per hour, required either by state law or by
The Consolidated Appropriations Act, 2018 (P.L. 115-141,
reference to federal law.
Division S, Title XII, Section 1201) amended the FLSA to
further clarify the use of employee tips. First, the act
Tip Pooling
provided, in part, that employers, managers, and
There is wide variation across states in tip pooling
supervisors are prohibited from keeping any portion of
provisions, with different state requirements not being
employee tips, regardless of whether or not the employer
easily classifiable. Several states do not address employer
uses the tip credit. Second, the act indicated that certain
provisions of the 2011 rule will have “no further force or
access to tips outside of the tip credit context, similar to the
effect” until “future action” on tip pooling by
FLSA prior to P.L. 115-141. Some states, such as
DOL.
Kentucky, prohibit mandatory tip pools but allow voluntary
Specifically, the act suspends the provisions from the 2011
agreements among employees. Other states, such as North
rule that prohibited tip pooling in instances when employers
Carolina and Delaware, allow mandatory tip pools but limit
do not use the tip credit against their minimum wage
the amount of tips that may be diverted into a tip pool.
obligation. In guidance issued following enactment of P.L.
Following the changes to the FLSA in the 2018
115-141 (Field Assistance Bulletin No. 2018-3), DOL
appropriations act, in states that do not permit a tip credit,
confirmed that employers paying the full federal minimum
employers may require tip pools that include tipped and
wage (i.e., not using the tip credit) are not prohibited from
non-tipped employees, unless state law otherwise prohibits
allowing non-tipped employees to participate in tip pools,
such actions.
but in no instance may managers or supervisors participate
in such pools. Table 1 provides a summary of which
employees are permitted to participate in tip pools based on
their employer’s use of the tip credit.
David H. Bradley, Specialist in Labor Economics
IF10917
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Tip Credit and Tip Pooling Provisions of the Fair Labor Standards Act
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