Employer Withholding Tips – Is It Ever Legal?

Posted on December 14, 2021

In most states, employers can never withhold tips or deduct wages based on the amount of tips earned, unless it is for a credit card fee or a tip pool. This is regardless of whether the employer takes a tip credit. Managers and supervisors can only keep tips that they directly and solely earned, and cannot benefit from tip pools.

The rules in California are different in several important ways.

When can an employer withhold a tip from tipped employees?

The employer or business establishment – including its managers, supervisors, or other agents – can never withhold a tipped employee’s tip, unless it is for a tip pool. However, employers can often deduct credit card fees from tips that are paid on a credit card.

The employer cannot directly withhold a tip by, for example, taking for itself a tip that was given to an employee. Employers also cannot do it indirectly by, for example, reducing an employee’s wages by the total of the tips they have received. Under federal law, the tip is the property of the employee. Withholding the tip would be wage theft under state and federal wage and hour law.

Tipped employees are those that work in a role that regularly and customarily receive more than $30 per month in tips and gratuities.¹

The federal Fair Labor Standards Act (FLSA) forbids employers from keeping tips received by their employees, regardless of whether the employer is taking a tip credit.²

However, employers can create tip pools. These distribute the tips given to employees that interact with customers, like waiters and bartenders, with other employees who might not, like cooks and busboys. Tip pools are permissible under federal law and do not amount to withholding a tip from the employee who received it.³ If the employer is not taking a tip credit, this form of tip sharing can benefit workers who are not in roles that customarily receive tips, like:

• dishwashers, and
• cooks.⁴

When tips are paid by credit card, employers can pass on the average credit card fees to their tipped employees.⁵ However, employers cannot withhold any more than is necessary to cover those processing fees from the credit card company.⁶

What if employers are taking a tip credit?

Even if employers are taking a tip credit under state or federal law, they cannot withhold an employee’s tips.

A tip credit uses an employee’s tips towards the employer’s minimum wage obligation. The FLSA sets the federal minimum wage at $7.25.⁷ However, the FLSA lets employers pay a base hourly wage of $2.13 to tipped employees.⁸ Employers satisfy their minimum wage obligations by using the tips that the employee receives to account for the remaining $5.12.

Employers have to notify employees if they are using these tip credit provisions to satisfy minimum wage laws.⁹

Employers taking a tip credit are limited in how they use tip pooling. They can only create a mandatory tip pool if they:

• limit beneficiaries of the pool to employees who customarily and regularly receive tips,
• notify the employees of any required contribution to the pool,
• only take a tip credit for the amount of tips that the employee receives, after the deduction for the tip pool, and
• do not retain any of their employees’ tips for any other purpose.¹⁰

Can managers or supervisors benefit from money in a tip pool?

No, managers and supervisors generally cannot benefit from money in a valid tip pool.¹¹ These workers can only keep tips that they were given by a customer for services that they directly and solely provided.

What about service charges?

Service charges are not considered a “tip” under the FLSA. Employers can distribute these charges to employees, but they are not counted as a tip. However, they can be used to satisfy minimum wage and overtime requirements.

Under the FLSA, a “tip” is a gift or gratuity given to an employee by a customer for service performed for the customer.¹² To be a tip, the customer must have sole discretion in whether to give it, and how much to give.¹³

Mandatory service charges are compulsory. Therefore, paying them is not in the customer’s discretion. This means that it is not a tip.

What is the law in California?

California state law has 3 important differences from the FLSA, and the regulations imposed by the Department of Labor (DOL), when it comes to tip withholding:

1. employers cannot claim tip credits to meet their full minimum wage payment obligations,
2. employers have to cover credit card fees, and
3. some supervisory employees may benefit from tip pools.

Most importantly for service workers, California does not allow tip credits. Employers cannot pay their tipped employees below the state’s minimum wage, and then credit the worker’s tips towards that minimum. Instead, employers must pay all of their workers, including tipped employees, the state or local minimum.¹⁴ Tips left for workers then supplement this base pay.

State law in California also differs from the FLSA in that employers have to cover credit card fees. They are not allowed to deduct these fees from tips that have been left for workers on a credit card payment. Employers have to pay workers the full amount of these tips and absorb the credit card transaction fee.¹⁵

California also allows supervisory employees to share in a tip pool. However, these supervisory employees cannot have the authority to hire or fire employees. This allows workers who do the same tasks as tipped employees, like shift managers, to benefit from a tip pooling arrangement.¹⁶

Workers benefit from these additional protections.

See our related article, Restaurant “Service Charges” in California – Does it have to go to workers?

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