An employer can use an employee’s tips as a credit against its minimum wage obligation to the employee (“tip credit”).  This provides a way for employers to legally pay an employee less than minimum wage.  Tipped employees are those who customarily and regularly receive more than $30 per month in tips.  If the employee does not earn enough in tips to meet the minimum wage then the employer has to pay the employee the difference for each hour that the employee did not meet the minimum wage.

A “tip pool” — when employees group their tips together — can be used to share to total amount of the tips received among employees who customarily and regularly receive tips, such as waiters, waitresses, bellhops, counter personnel who serve customers, bussers and service bartenders. Employers should be cautious not to share the tip with anyone who does not customarily and regularly receives tips, such as dishwashers, cooks, chefs, and janitors. Otherwise, the tip pool may be invalidated, in which case the employer will be unable to claim the tip credit towards minimum wage and overtime requirements.  The employer must also notify tipped employees of any required tip pool contribution amount, may only take a tip credit for the amount of tips each tipped employee ultimately receives, and may not retain any of the employees’ tips for any other purpose.

The FLSA prohibits the employer from retaining any part of the tip received except when the tip was through a credit card transaction. When tips are charged on a credit card and the employer must pay the credit card company a percentage on each sale, the employer may deduct that percentage from the amount that the employee receives in the tip.  If the tip pool is invalidated because the employer included employees who do not customarily and regularly receive tips, the employee is owed all tips he or she contributed to the pool and the full minimum wage.