Tip Pooling, Service Charges, and the Rules That Govern Them

Under federal law a tip is the property of the employee who receives it. An employer may not keep any part of it, and neither may a manager or a supervisor, whether or not the business uses a tip credit. That rule comes from amendments to the Fair Labor Standards Act made in 2018, and it is the fixed point everything else in this area turns on. A mandatory service charge is a different thing entirely, because it is not a tip at all.

The starting rule and who counts as a manager

The prohibition on employers keeping tips is absolute as to any purpose — not for breakage, not for walked checks, not for a general fund. It extends to managers and supervisors, and the test for who is a manager borrows the duties test used for the executive exemption rather than a job title. Someone called a "shift lead" may or may not be a supervisor for this purpose depending on what they actually do.

There is one narrow allowance. A manager or supervisor may keep tips they receive directly from a customer for a service they solely and directly provided — a bartending shift they worked alone, for example. They may not take a share from a pool of other employees' tips.

The definitions, including who is a tipped employee, sit in 29 U.S.C. § 203. The statute defines a tipped employee by reference to a monthly tip threshold fixed in the text; the operational guidance sits with the Wage and Hour Division.

The tip credit and its conditions

A tip credit lets an employer count some of an employee's tips toward the federal minimum wage, paying a reduced direct cash wage. It is a permission, not a default, and it is conditional. Four requirements travel with it.

1. The employee must be a tipped employee. Customarily and regularly receiving tips above the statutory monthly threshold is the test, not merely working in a restaurant.
2. Notice must come first. The employer must inform the employee of the tip-credit provisions before taking the credit, including the cash wage, the credit claimed, and that tips are the employee's except for a valid pool.
3. The employee keeps the tips. Only a lawful tip pool may divert any of them.
4. The total must reach the minimum wage. If cash wage plus tips fall short in a workweek, the employer makes up the difference.

Two mechanics catch employers out. Overtime for a tipped employee is calculated from the full minimum wage, not from the reduced cash wage, so the overtime premium is larger than a naive calculation suggests. And the tip credit applies only to hours worked in the tipped occupation — an employee who spends part of the week in a genuinely separate non-tipped job must be paid the full wage for those hours under the long-standing dual jobs regulation.

Note: The Department of Labor's 2021 rule adding percentage and time limits on tip-supporting work — often called the 80/20/30 rule — was vacated by a federal court of appeals in 2024 and, as of mid-2026, is not in effect. The older dual jobs concept survives. Because this has moved twice in recent years, confirm current status with the Wage and Hour Division before designing a scheduling policy around it.

Who may be in a tip pool

Whether the employer takes a tip credit decides who can share. This is the single most useful distinction in the whole subject.

A pool that includes even one ineligible participant can invalidate the tip credit for the whole period, which is why these claims produce large exposures across a class of employees. Employers must also keep records identifying employees who receive tips and the amounts, and pay out pooled tips no later than the regular payday for the period.

Where a business processes tips on credit cards, federal guidance has permitted deducting the proportionate share of the processing fee from the tip, provided the employee still receives at least the minimum wage and payment is not delayed past the regular payday. Several states forbid that deduction outright, which is one of the more common places state law overrides the federal position.

Service charges are not tips

A tip is a voluntary payment whose amount the customer decides. A charge the customer must pay — an automatic percentage for large parties, a banquet or event fee, a delivery charge, a "kitchen appreciation" line on the bill — is compulsory and therefore not a tip.

Three consequences follow, and they run in the employees' favor as often as against.

• Service-charge revenue belongs to the business as part of gross receipts. Federal law does not require any of it to be distributed to staff.
• Amounts that are distributed count as wages, not tips. They can satisfy the employer's minimum wage obligation directly, but they cannot support a tip credit.
• Because they are wages, distributed service charges must be included in the regular rate when overtime is calculated — a step frequently missed, and a common source of back-pay liability.

Watch out: Labelling a compulsory charge a "gratuity" on the check does not make it a tip. It also raises a separate consumer-facing problem, because several states and cities require clear disclosure of what a service charge is and whether it goes to staff.

The state layer sitting on top

The FLSA is a floor. States regulate tips heavily and often more strictly, so the federal answer is rarely the whole answer.

Several states prohibit the tip credit entirely and require the full state minimum wage in cash before tips — California, Oregon, Washington, Nevada, Montana, Minnesota and Alaska are the usual examples, though the list has changed and some states are phasing the credit out. Other states allow a credit but set a higher required cash wage than the federal figure. Some restrict or forbid mandatory tip pools, or prohibit any deduction from tips for card processing. A number of states regulate service charges specifically, with disclosure duties or rules about how banquet charges are distributed.

The practical rule for a multi-state operator is that pay structure cannot be designed once and copied. Confirm the state's tip-credit status, required cash wage, pooling rules and service-charge rules for each location, then apply whichever standard is more protective of the employee. Current federal thresholds and worked examples sit in the Wage and Hour Division's fact sheet library rather than in this article, because the underlying figures are revised.

Common questions

Can my boss take a cut of the tip pool for running the register?

No. An employer may not keep any portion of employee tips for any purpose, and that holds whether or not a tip credit is used. The only exception is a supervisor keeping a tip a customer gave directly for a service the supervisor personally and solely provided. Administrative effort, breakage, walkouts and cash shortages are not lawful reasons to divert tips into the business.

Do cooks get a share of tips?

Only where the employer pays the full minimum wage in cash and takes no tip credit. In that situation federal law permits a broader pool that includes back-of-house employees. If the employer takes a tip credit, including cooks or dishwashers in the pool makes it invalid and puts the credit itself at risk. State law can restrict this further, so a lawful federal arrangement may still fail locally.

The 18 percent added for my party of eight — is that my server's tip?

Not automatically. A compulsory charge is a service charge rather than a tip, and federal law leaves distribution to the business. Some restaurants pass all of it to staff, some part of it, some none. Where it is passed on it counts as wages, which affects overtime calculations. Several states now require the receipt or menu to say plainly whether a service charge goes to employees.

What records should a tipped employee keep?

Keep your own daily record of hours worked, tips received in cash and on cards, and any pool contributions or payouts. Save schedules and pay statements. In a wage dispute the employer's records are the starting point, and where those records are incomplete a worker's contemporaneous log carries real weight. Note also which shifts involved substantial non-tipped duties or a second job function.

Checking a tip arrangement

Start with the pay statement. It should show the direct cash wage, the hours, and — if a tip credit is claimed — the amount of the credit. If the statement does not disclose a credit but the cash rate is below the minimum wage, that is the first thing to ask about. Then look at who is in the pool. A single manager or a single back-of-house participant, in a workplace where a credit is taken, is enough to raise the issue.

Complaints can go to the Wage and Hour Division, which enforces the FLSA and can recover unlawfully kept tips, or to the state labor agency, which may offer a faster route where state law is more protective. Employees who raise the issue together should know that group action about pay carries its own federal protection, described by the National Labor Relations Board and in our analysis of protected concerted activity without a union.

Employers should put the tip-credit notice, the pool composition and the service-charge disclosure in writing and review them whenever a location opens in a new state. Where those rules live in a general staff document, the drafting cautions in our guide to employee handbooks apply. Unpaid trainees and trial shifts raise a separate federal question covered in our explainer on when a trainee must be paid, and deductions ordered by a court are governed by the entirely different limits in our guide to wage garnishment at work.