paying tipped employees

The complete guide to paying tipped employees in Tennessee

If your restaurant, bar, club or hotel employs tipped staff, this post is for you. Guest blogger and employment law guru Casey Duhart gives the lowdown on avoiding seriously expensive lawsuits for wage and hour violations.

Casey asks: “Why are tipped employees bringing so many wage and hour lawsuits these days?” Casey’s answer is simple: “Too many employers are not using the tip credit correctly.”

Read Casey’s advice for avoiding tip credit pitfalls.

What is a Tipped Employee?

A tipped employee is an employee who customarily and regularly receives more than $30 per month in tips. An employee does not meet the “customarily and regularly” requirement if the employee only receives $30 or more monthly during the holidays or special events.

See Also: Your Comprehensive Guide to Property Transfers

What is the Fair Labor Standards Act?

Wage-related rules for tipped employees who receive money from customers are governed by the Fair Labor Standards Act (“FLSA”).

What is the Tip Credit?

Under the FLSA, employers can claim a tip credit toward the federal minimum wage. This credit means that an employer can pay tipped employees a lower wage than the federal minimum wage.

The current federal minimum wage – and the minimum wage in all of Tennessee – is $7.25 per hour.

An employer can claim a maximum tip credit of $5.12 per hour and pay tipped employees $2.13 per hour.

paying tipped employees

Notice Requirement

Before you can claim a tip credit, you must provide the following information to each tipped employee:

  • the amount of cash wages the employer is paying a tipped employee. The minimum wage for tipped employees is $2.13 per hour;
  • the additional amount claimed by the employer as a tip credit, which cannot exceed $5.12 (the difference between the minimum required cash wage of $2.13 and the current minimum wage of $7.25);
  • that the tip credit claimed by the employer cannot exceed the amount of tips actually received by the tipped employee;
  • that all tips received by the tipped employee are to be retained by the employee except for a valid tip pooling arrangement limited to employees who customarily and regularly receive tips; and
  • that the tip credit will not apply to any tipped employee unless the employee has been informed of these tip credit provisions.

If you fail to provide this information to a tipped employee, you will be required to pay the tipped employee at least $7.25 per hour in wages and allow the tipped employee to keep all the tips.

Here is a simple rule: provide this information in writing to all employees, when they are hired.

Overtime Compensation

If you claim a tip credit, overtime is calculated on the full minimum wage of $7.25; not the lower direct (or cash) wage payment of $2.13.

Example: A tipped employee works 60 hours in a workweek.

            Step 1: Use the minimum wage to calculate the overtime rate.

$7.25 x 1.5 = $10.88

            Step 2: Subtract the tip credit from the overtime rate to achieve the adjusted rate and multiply by overtime hours worked that week.

            $10.88 – $5.12 = $5.76

            $5.76 x 20 overtime hours = $115.20

            Step 3: Add the employee’s straight pay plus the overtime pay to calculate the pay for that week.

            40 hours x $2.13 = $85.20 straight time

            $85.20 + $115.20 = $200.40


You cannot require a tipped employee to pay for their uniform out-of-pocket if the cost would reduce the tipped employee’s wages below the minimum wage of $7.25 per hour.

Example: If a tipped employee is paid $2.13 per hour and worked 40 hours in a workweek and received $205 in tips (total compensation of $290.20) charging the employee $15 for a uniform shirt would cause the employee’s wages to fall below the minimum wage for that week.

Keep in mind that “street wear” such as ordinary shirts and/or pants of a standard style is not considered a uniform. As a rule of thumb, the more specific your requirements for employee clothing, the more likely it is that it will be considered a uniform.

You may be financially responsible for the cost of cleaning the uniform if the uniform requires daily washing, special commercial laundering, ironing or other special treatment (such as dry cleaning).

Tip Pooling

The FLSA requires that tipped employees keep their tips. However, you can require tipped employees to share their tips with other employees who customarily and regularly receive tips. People who don’t normally receive tips, such as cooks, dishwashers, janitors, and chefs, cannot be included in the tip pool.

Have a clear tip pooling policy. Although not required by law, you should ask all tipped employees participating in the tip pool to sign a tip pooling agreement.

Service Charges

A charge for service, for example, 20 percent of a bill, is not a tip! A compulsory service charge is part of the employer’s gross receipts, which means that the employer may choose to retain the gain or distribute all or part of it to employees. Therefore, service charges are not counted as tips. Unlike tips, you must collect and pay sales tax on service charges.

paying tipped employees

Credit Card Fees

Customers who pay by credit card usually write in their tip. However, with each credit card transaction, you are charged a transaction fee by the credit card company. You are allowed to pay the employee the tip, less that transaction fee. For example, where a credit card company charges an employer 3 percent on all sales charged to its credit service, the employer may pay the tipped employee 97 percent of the tips without violating the FLSA. However, the charge on the tip may not reduce the employee’s wage below the required minimum wage.


Deducting a tipped employee’s pay for walk-outs or cash register shortages is illegal if the deduction reduces the employee’s wages below the minimum wage.

Not Making up the Difference

An employer must make up the difference if a tipped employee’s wages does not reach the minimum wage when you add their tips to their cash wages. Double and triple check that tipped employees make at least minimum wage.

Example: If a tipped employee is paid $2.13 per hour and worked 40 hours in a workweek and received $75 in tips (total compensation of $160.20) the employee’s compensation is below the minimum wage ($7.25 x 40 hrs = $290) and the employer must make up the difference of $129.80.

Record and Pay for all Time Worked

Be sure that you have a timekeeping and payroll system that captures all time worked by tipped employees and all tips received. Even a simple sign-in sheet or iPad app is better than nothing.

Be Diligent

Restaurants and hospitality employers are easy targets for wage and hour lawsuits and audits. Because the tip credit laws can be tricky, make sure you are diligent about compliance and accurate record keeping.  If in doubt, contact an attorney that practices employment law to help evaluate your tip credit policies and procedures.