The tip credit is the legal mechanism that allows employers to pay tipped workers a "direct wage" below the regular minimum wage, with the assumption that tips will make up the difference. Under the federal Fair Labor Standards Act (FLSA), the tip credit lets an employer pay $2.13/hr direct wage, taking a $5.12/hr credit against the $7.25/hr federal minimum.
For the tip credit to be legal:
- The worker must regularly receive more than $30/month in tips
- Total earnings (direct wage + tips) must equal at least the full federal/state minimum wage. If tips fall short, the employer must make up the difference.
- The worker must be notified of the tip credit in writing
- The worker keeps all tips except for valid tip pool contributions
State variations matter enormously. Seven states (California, Oregon, Washington, Minnesota, Montana, Alaska, Nevada) prohibit any tip credit — tipped workers earn full state minimum wage as direct pay plus tips on top. Most other states allow some tip credit, often above the federal $2.13. See our tip pool rules guide for the full state map.
The tip credit only applies to tipped duties. Time spent on non-tipped sidework (rolling silverware, deep cleaning) is governed by the 80/20 rule — historically capped at 20% of work time at the tipped wage, with the rest at full minimum wage.