Restaurant Management: Tipped Employees

Restaurant Management: Tipped Employees

The restaurant POS market is dynamic. The average refresh rate for a restaurant point of sale is 5-10 years. In the last 5 years computer technology has changed considerably.

This guide to restaurant employee tipping policies will cover:

  • Restaurant tipping culture
  • Employer wage benefits from tipping
  • State and Federal wage laws related to tipping
  • Tips for kitchen staff and why it’s controversial
  • Tip-pool practices and legal issues
  • Credit card tip deductions
  • The future of tipping
  • Federal and State labor board resources regarding tipped employees

This guide will help you understand the ins-and-outs of managing tipped employees while maintaining compliance with government regulations.

Read More: Choosing a Restaurant Business Structure

Tipping Basics

It’s customary for our servers and other front-of-house people to receive tips. Tipping gives waitstaff an incentive to provide superior guest service and increase sales.

According to the law

  • A “tipped employee” is defined as anyone making over $30 in tips every month.
  • Tips are considered property of the employee who directly received the tip.
  • Employers may not use tips for anything other than as a credit against their minimum wage obligation. This is referred to as an FLSA (Fair Labor and Standards Act) tip credit.
  • A tipped employee may be required to participate in a valid tip pool as long as the restaurant's policy on tipping is disclosed ahead of time.
  • A legal mandatory tip pool must only include other tipped employees.
  • No portion of an employee's tips can be claimed by restaurant managers or owners.
  • Tips must be disbursed to employees at the end of the shift or on their next regular paycheck.

Some of these rules might seem silly or unfair. If you’ve been working in the restaurant industry for some time you’ll know that many restaurants do not operate in accordance with these rules.

As a restaurant owner or manager, it’s extremely important to understand that violating the US Federal Fair Labor Standards Act can put you in serious hot water with the Department of Labor.

If there has been a long period of non-compliance, it just takes one disgruntled employee to start a snowball that can turn into a class action lawsuit that can cost hundreds of thousands of dollars.

Read More: Choosing a Restaurant Business Structure

Employer FLSA Tip-Credits

In most states, as an employer, you’re allowed to use tips received by staff as a credit against paying minimum wage out of pocket. For those restaurants in states that allow it, this credit can significantly reduce one of the highest operational costs in the business.

The federal government’s Department of Labor offers the following guidelines:

  • Based on the number of hours worked, figure out how much they would be paid according to the federal minimum wage of $7.25 an hour.
  • If the employee received equal to or more than this amount in tips during the hours worked, you are only required to pay $2.13 per hour to the tipped employee.

This means that based on the federal law and the minimum wage of $7.25 an hour, the maximum amount of wage credit you can claim as a restaurant owner is $5.12 per hour. But that is pretty significant savings!

Overtime Tip-Credits

Tip credits during overtime are handled a little differently.

  • Overtime is paid at 1.5X the employee’s regular rate of pay, not the minimum payment.
  • Because the maximum credit allowed per hours worked is $5.12, the difference is paid by the restaurant.

Here’s an example of overtime pay based on a federal minimum wage of $7.25

  • $7.25 X 1.5 = Overtime rate: $10.88
  • Maximum Tip Credit: $5.12
  • $10.88 - $5.12 = $5.76 paid per hour of overtime by the restaurant
  • Assuming the employee’s tips cover the balance

Read More: Choosing a Restaurant Business Structure

State Versus Federal Tip-Credit Laws

State laws are not necessarily the same as the federal laws. This map shows how some states have different minimum wage laws for tipped employees.

Some states do not allow a tip credit to be taken against the state’s regular minimum wage. It’s important to fully understand how tipped employees are paid according to your state’s laws to be compliant. Consult your state labor board for details.

US Map

To Pool or Not to Pool Tips?

When it comes to morale boosting incentives tips are the most direct way for guests to reward excellent service.

Many staff members like to pool tips after their shift because it can foster a sense of teamwork. Additionally, tip pools can buffer their losses on a slow night. For example, tables with a view tend to book and have more seatings than tables near the kitchen.

On the other hand, should a server who is working more tables take home the same tips as someone who’s working less?

Tip Pool Legal Issues

There are additional laws about tip pools that restaurant owners and managers must be aware of.

  • A valid tip pool is made up of positions which are customarily tipped. This includes the waitstaff, bartenders, and bussers—but not kitchen staff.
  • An employee may be required to contribute to a tip pool but they are not required to contribute tips contributing to their base pay.
  • Tips that management claim as a credit against minimum wage cannot be included in the tip pool. According to federal law, employees can’t have made less than minimum wage after tips.
  • When tips are pooled, they cannot be redistributed based on performance. The Department of Labor forbids using tips “for management's use.” In this case, in place of a performance bonus.

The culture of your restaurant and organizational style will help you decide the best type of tip pool and if tip pooling is right for your team.

Read More: Choosing a Restaurant Business Structure

Controversy and Fairness to Kitchen Staff

Because the law specifically makes it illegal for employers to require tipped employees’ wages to go to kitchen staff, there has been some recent controversy about fairness in the workplace—and some expensive lawsuits.

Because kitchen staff do not customarily receive tips, the Department of Labor does not permit them to participate in restaurant tip pools.

However, kitchen staff generally make minimum wage and perceive their jobs as harder than front-of-house. This can create an increasing animosity between cooks and servers.

Tipping Out The Kitchen

In many restaurants in an attempt to mitigate tensions, restaurant owners require tipped employees to “tip out” kitchen staff. Many restaurants have tip pools that include cooks.

Be aware that these common restaurant practices put your business at serious legal risk with the Department of Labor. Doing so is in direct violation of the government’s FLA law.

In Pursuit of Fairness

This is such a contentious issue that the National Restaurant Association has asked the Supreme Court to reject the authority of the Department of Labor to make tip pooling with the kitchen illegal.

However, as the law stands today, tips are the property of the person tipped. Tipped employees cannot be obligated by management to share any tips with back-of-house staff.

As a restaurant owner or manager, even if you “strongly imply” that tipped employees owe the kitchen it could lead to expensive legal trouble. If tipped employees can show that not tipping cooks lead to reduced hours, harassment or firing you’ll be in hot water with the Department of Labor.

To address this problem, some restaurants have begun adding a tip line on credit card receipts for the kitchen. Unfortunately, few guests are familiar with this new practice and it is met with confusion.

Read More: Choosing a Restaurant Business Structure

Deducting Credit Card Fees From Tips

Credit card tips make it easy for guests to add a tip to their check. But for the owner it comes with merchant processing fees required to run the card. The question is whether you should deduct the processing fee from the tip amount.

In theory, it would seem like the fair thing to do, since it costs you money to facilitate the tip. However, in practice, it can be difficult to do so in compliance with the law.

Only some states allow the practice of deducting merchant processing fees from server’s tips. The states that allow it require you to make sure you’re not overestimating the charge.

Because credit card processing fees are variable per transaction, it’s tricky for you to get it right. It’s less risky and better for employee morale to just let it ride.

Instead, focus on finding the POS with the lowest credit card processing fees. You’ll end up saving a lot more money taking this route. Rezku can help you lower your merchant fees and guarantee to lock in your low rate

In states that allow you to withhold a percentage of credit tips to cover processing, it can only be used by the restaurant as a tip-credit against minimum wage. You can’t take merchant fees out of the server’s base pay.

Read More: Choosing a Restaurant Business Structure

A Future Without Tipping?

There is a debate going on in American culture and in the restaurant industry. Will restaurant tipping continue to be practiced in the future?

Reasons to do away with tipping:

  • Makes the payment process more streamlined
  • A restaurant without tips may be more inviting to guests who aren’t sure how much to tip
  • Closes the pay gap between kitchen and front of house

Tipping is not the norm in most of Europe and Asia. Instead, prices are raised on the menu and employees receive a higher base wage. If restaurant prices were raised 10%-15%, wouldn’t customers be paying the same at the end?

Some intrepid restaurant owners have already started building on this model, finding that prices on some dishes are more elastic than conventionally thought to be. They were able to raise prices slowly by 8-10% without customer resistance.

Instead of a tip line on their credit card receipts they added a star rating for the food and the service. With this valuable information it allowed the restaurants to discount meals for bad service.

The star rating helped them improve the menu and identify where training and management style could be modified to increase customer satisfaction.

Other restaurants have simply started charging a flat 15% gratuity to all guests. Unlike tips, gratuity goes to the house and can be used by management however they see fit.

Charging a flat gratuity to all guests allows restaurant owners the flexibility to split the service fee among staff as they deem equitable, including additional compensation for the kitchen.

Read More: Choosing a Restaurant Business Structure

Labor Laws and the Fair Labor Standards Act

The Department of Labor is very serious about the enforcement of its laws. “Not knowing” isn’t a valid excuse in their eyes. The frequency with which large, well-established restaurant brands are found to be out of compliance is a clear warning.

Can you afford to risk the financial well-being of your restaurant because you didn’t like the laws on tipping? The last thing you want is for your hard work to be sunk by a labor dispute brought by an employee who knew the tipping laws better than you.

The Department of Labor also has links to help you navigate state and local laws. Find your state’s labor board here:

Read More: Choosing a Restaurant Business Structure


The practice of tipping in restaurants is ingrained in our culture. As a restaurant manager or owner it is up to you to set the policies and practices regarding tips in your restaurant.

Tips can be used as a credit against minimum wage paid by the restaurant, when done in accordance with state and federal law. Be aware that each state has their own set of rules.

Tips are seen by the Department of Labor to be the property of the person tipped. While tip pools are popular in restaurants, they must be conducted in accordance with the law or the restaurant risks legal troubles.

While requiring tips to the kitchen seem like they’re fair, the law doesn’t look at it that way. They can be given voluntarily by tipped employees, however. In the future tipping may seem like an outdated practice, replaced by raising prices or charging a flat gratuity. This gives restaurant owners increased flexibility in how the money is distributed.

Follow the Department of Labor guidelines and become familiar with the laws. Use the Federal and State Department of Labor websites to find up to date information.

This guide to restaurant tipped employees is part of the free resource library provided by Rezku. Rezku is a leading restaurant systems developer with solutions including point of sale, host stand management, online ordering and delivery, merchant processing and more. For a free restaurant management technology consultation contact us today. To learn more about Rezku visit our homepage.

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