Employer Withholding Tips – Is It Ever Legal?

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 my employer withhold my tips?

The employer or business establishment – including its managers, supervisors, or other agents – can never withhold your tips, unless they are 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 you. Employers also cannot do it indirectly by, for example, reducing your wages by the total of the tips you have received. Under federal law, the tip is your property. Withholding your tip would be wage theft under state and federal wage and hour law.

You are considered a tipped employee if you work in a role that regularly and customarily receives more than $30 per month in tips and gratuities.¹

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

However, employers can create tip pools. These distribute the tips given to employees who 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 you as a tipped employee.⁵ However, employers cannot withhold any more than is necessary to cover those processing fees from the credit card company.⁶

What if my employer is taking a tip credit?

Even if employers are taking a tip credit under state or federal law, they cannot withhold your tips.

A tip credit uses your 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 you receive to account for the remaining $5.12.

Employers have to notify you 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 you of any required contribution to the pool,
• only take a tip credit for the amount of tips that you receive, after the deduction for the tip pool, and
• do not retain any of your 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 you and other 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 you 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 at 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 you below the state’s minimum wage and then credit your tips towards that minimum. Instead, employers must pay all of their workers, including tipped employees, the state or local minimum.¹⁴ Tips left for you 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 you on a credit card payment. Employers have to pay you 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

As a worker, you benefit from these additional protections.

Additional resources

For more information, refer to the following:

• The Case for Tipping and Unrestricted Tip-Pooling: Promoting Intrafirm Cooperation – Boston College Law Review.
• The effects of tip distribution policies: Servers’ keeping vs sharing/pooling tips affects tippers’ sentiments but not tip-giving – International Journal of Hospitality Management.
• The Case for Tipping and Unrestricted Tip-Pooling – New York University Public Law and Legal Theory Working Papers.
• Restaurant employees given $61,000 after managers caught dipping into tip pool, federal agency says – Article in USA Today.
• Do You Know Where Your Tip Money Is Going? – Article in Eater.

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

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