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What are tip credits and how do they impact your business?

Updated: Feb 7

Even if you’ve only experienced tipping at restaurants as a diner, you’re already familiar with the most standard tipping practice: be kind to your server and always plan to have a minimum of 15% included on top of the bill. But where does this practice come from and why is it important to understand?


Put as simply as possible, tip credits are a way for business owners to not pay their employees minimum wage. While at first glance, this might sound jarring, this is fairly standard practice across restaurants in the United States with the exception of just a few states: California, Washington D.C., Minnesota, Alaska, Oregon, Nevada, and Montana. 


Are Tip Credits Legal and Fair to Employees?


The reality is, when done correctly and fairly, tip credits are a great way for business owners to lower operational costs and provide more shifts for tipped employees to take on. In fact, studies have shown that “eliminating the tip credit and increasing the minimum wage typically leads to a decline in employment opportunities for tipped employees.” You can hire more people if each employee costs you less money per hour.


In fact, when Washington D.C. was voting to get rid of the tip credit back in 2018, some restaurant-goers experienced vocal opposition to the bill from servers. According to Skift Table, patrons reported that “servers in some establishments would slip fliers in with the bill at the end of the meal telling diners to vote in favor of keeping the credit.” This could be due to employers telling employees that if the bill was passed they would lose hours or their jobs entirely - we can't be certain.


Understanding Tip Credit Laws


You might be wondering: what is a tip credit and how does it work? First and foremost, the process stems from the requirement for every employer to meet the minimum wage requirements for employees who are regularly tipped: bartenders, servers, and baristas are just to name a few. When workers in these positions receive compensation from their customers in the form of tips, their employers are legally able to claim a tip credit.


This is done by counting an employee’s tip towards their required minimum hourly wage. So, legally, employers are allowed to include a worker’s tips as income in order to get their employees to the minimum wage threshold obligation. That said, if Joe the barista doesn’t make enough in tips to reach that threshold, then the owner of the coffee shop will have to pay the difference. 


Who Can Use Tip Credits?


The US Department of Labor states that an employee is considered to be a “Tipped Employee” once they make over $30 of tips within a month. 


As it stands today, the minimum required cash wage that needs to be paid to tipped employees is $2.13 per hour, while the federal minimum wage is significantly higher at $7.25. In this most basic case, the tip credit would turn out to be $5.12 per hour. Because the minimum wages do vary from state to state, make sure to take a look at all the specific minimum wage requirements here.


TipHaus is a turnkey automated tip distribution software created to integrate directly with the Point-of-Sale system in place. TipHaus was created by Restaurant consultants to save managers and staff members time, money, and potential legal liability.

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