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Tipped wage
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Tipped wage
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The tipped wage is the base wage paid to an employee in the United States who receives a substantial portion of their compensation from tips. According to a common labor law provision referred to as a "tip credit", the employee must earn at least the state's minimum wage when tips and wages are combined, or the employer is required to increase the wage to fulfill that threshold.[1][2][3] This ensures that all tipped employees earn at least the minimum wage: significantly more than the tipped minimum wage.

Tipped minimum wage law in the United States

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Federal law

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The United States federal government requires a wage of at least $2.13 per hour be paid to employees who receive at least $30 per month in tips.[4] If wages and tips do not equal the federal minimum wage of $7.25 per hour during any week, the employer is required to increase cash wages to compensate.[5]

State law

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Though the vast majority of employers are bound to the federal minimum wage, some states have chosen to increase the tipped minimum wage above the federal requirement. Seven states (and the territory of Guam) apply the same minimum wage to tipped and non-tipped employees. The other 43 states – including those without state minimum wage laws – have a lower minimum wage for tipped employees than for traditional employees, and require employers to make up for any wages that fall below the minimum wage.[6]

The District of Columbia, which has the highest-paid waiters and waitresses in the country (mean wage: $24.42/hour),[7] has a minimum wage of $8.00 for tipped employees. In the state of Alaska, California, Minnesota, Montana, Nevada, Oregon, Washington, same minimum wage are applied for both tipped and non-tipped employees. Tips collected by employees in these states will not offset employer's obligation to pay the wage, and tips is the additional income beyond the wage paid by employer. The District of Columbia will be eliminating the tipped wage by 2027.

Minimum tipped wage by U.S. state, District of Columbia (D.C.), and U.S. territories[8]
State, D.C., territory Wage Notes
Alabama $2.13
Alaska $11.73 Same for tipped and non-tipped employees.
Arizona $11.35 Tipped wage plus tips must reach $14.35/h.
Arkansas $2.63 Tipped wage plus tips must reach $11.00/h.
California $16.00 Same for tipped and non-tipped employees.
Colorado $11.40 Tipped wage plus tips must reach $14.42/h.
Connecticut $13.00 Bartenders’ minimum wage is $8.23/h, Hotel/Restaurant minimum wage is $6.38/h, tipped wage plus tips must reach $15.69/h.
Delaware $2.23 Tipped wage plus tips must reach $13.25/h.
District of Columbia $10.00 Tipped wage plus tips must reach $17.50/h.[9] By 2027, the tipped wage will be eliminated.[10]
Florida $8.98 Tipped wage plus tips must reach $12.00/h.
Georgia $2.13
Hawaii $12.75 Tipped wage plus tips must reach $14.00/h.
Idaho $3.35
Illinois $8.40 Tipped wage plus tips must reach $14.00/h.
Indiana $2.13
Iowa $4.35
Kansas $2.13
Kentucky $2.13
Louisiana $2.13
Maine $7.08 Tipped wage plus tips must reach $14.15/h.
Massachusetts $6.75 Tipped wage plus tips must reach $15.00/h.[11]
Maryland $3.63 Tipped wage plus tips must reach $15.00/h.
Michigan $3.93 Tipped wage plus tips must reach $10.33/h.
Minnesota $10.85 or $8.85 Same for tipped and non-tipped employees. Lower wage for employers making under $500,000 gross sales.
Mississippi $2.13
Missouri $6.15 Tipped wage plus tips must reach $12.30/h.
Montana $9.20 or $4.00 Same for tipped and non-tipped employees. Lower wage for employers not covered by FLSA and earning less than $110,000 in gross sales.
Nebraska $2.13 Tipped wage plus tips must reach $12.00/h.
Nevada $11.25 Same for tipped and non-tipped employees. Minimum wage is $10.75 when it is accompanied by health insurance benefits.
New Hampshire $3.27
New Jersey $5.26[12] Tipped wage plus tips must reach $15.13/h.
New Mexico $3.00 Tipped wage plus tips must reach $12.00/h.
New York $15.00 Tipped wage varies by industry but state level set at $10.00 for food service employees and $12.50 for other service employees.
North Carolina $2.13
North Dakota $4.86
Ohio $5.25 Tipped wage plus tips must reach $10.45/h, employers who gross less than $342,000 annually will not be covered by the law.
Oklahoma $2.13
Oregon Base: $14.20
Portland metro area: $15.45
Rural: $13.20		 Same for tipped and non-tipped employees.[13]
Pennsylvania $2.83
Rhode Island $3.89 Tipped wage plus tips must reach $14.00/h.
South Carolina $2.13
South Dakota $5.60 Tipped wage plus tips must reach $11.20/h.
Tennessee $2.13
Texas $2.13
Utah $2.13
Vermont $6.84 Tipped wage plus tips must reach $13.67/h.
Virginia $2.13
Washington $16.28 Same for tipped and non-tipped employees.
West Virginia $2.62 Tipped wage plus tips must reach $8.75/h.
Wisconsin $2.33
Wyoming $2.13
US territories
Puerto Rico $2.13
Guam $9.25
Commonwealth of the Northern Mariana Islands $2.13
US Virgin Islands $4.20 Tipped wage plus tips must reach $10.50/h.

Disagreement over consequences

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There is disagreement among economists, business leaders, and labor activists regarding whether the tipped wage should be higher and whether tipped employees should receive a different wage than non-tipped workers.

Proponents of a different wage for tipped and non-tipped workers point out that the law guarantees tipped employees the same minimum wage that other workers receive. They argue that because restaurants have very thin margins, an increase in the minimum wage could lead to higher prices for consumers and fewer jobs available for potential employees.[14] A 2011 study suggested that 2011's WAGE Act, which would have raised the minimum wage for all tipped employees in The United States, would have led to a cumulative decrease in 11 million hours worked by tipped employees.[15] The same research found that each 10% increase in the cash wage paid to tipped employees tends to decrease hours worked by the affected employees by 5%. A 2012 study found that eliminating the tip credit tends to decrease employment in the U.S. restaurant industry.[16] Others express fear that eliminating the tip credit would result in fewer tips.[17] Some argue that eliminating the tip credit exacerbates income inequality by benefiting the more well-paid servers at the expense of the non-tipped back-of-the-house staff.[18]

In Massachusetts, where the tipped minimum wage is $2.63, the average income of tipped waiters and waitresses is $12.88. In Washington State, where the minimum wage for wait staff is $9.47, the average wage is $13.25 after gratuity. Of the five states where wait staff earn the highest average income per hour, four have a tipped minimum wage below the non-tipped minimum wage.[19] It is important to note, however, that these figures relate only to tips reported to the government for taxes, and that real tips may be significantly higher.

Opponents of the current minimum wage for tipped employees point out that the tipped minimum wage has remained stagnant since 1991 despite increases in the cost of living and in the standard minimum wage over that same time.[20] The minimum wage for tipped employees represented 50% of the standard minimum wage in 1968. By 2010, it was 29% of the non-tipped minimum wage.[21]

They also contend that, while employers are required to ensure that all employees receive the minimum wage after tips, the current system makes it possible for some employers to illegally coerce employees to over-report tips or dock their pay so that their final income is below the minimum wage.[22][23] Others argue that because tips often represent 50–90% of a waiter's income,[24] workers’ incomes are unfairly vulnerable to fluctuations in customers’ generosity.

Advocates

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One such advocate is called Restaurant Opportunities Centers United (ROCUnited).[25] This group is a non-profit organization who stands for those within the restaurant industry and calls for changes to be made. They talk about the demographics within the restaurant industry such as 54% of those who work in the restaurant industry are women[25] and they share the struggles with those that have some of the lowest paying jobs within the restaurant industry. A recent 2020 analysis of restaurants post-pandemic stated more than a third of all women working in the restaurant industry are mothers, and well over half are single mothers.[25] The state of the restaurant business following the COVID-19 pandemic is that nearly six million restaurant workers lost their jobs.[25] Poverty statistics for these workers is that 16.5% of tipped restaurant workers are in poverty and 17.6% of back-of-house workers are in poverty.[25] On a national average as well, the U.S. livable wage is $31.90 where the tipped subminimum wage is $2.13, and the average minimum wage is $7.25.[25]

Research has been done as well regarding tipped minimum wage when it comes to restaurant management and owners and how they have control over tips and the wages of the employees. The researchers present that a tipped minimum wage is just a way to control the labor of their employees and it also allows for owners to have more control.[26] Employees have no control over how much they are tipped, as that is based on the customer's discretion.[26] ROCUnited also looks to start campaigns to bring awareness to those not associated with the restaurant industry and to give workers voices. There is evidence that citizens might not know because it is information that is kept from them by those higher up within the industry. For example, the ROCUnited found through a federal review there was fraud within hour and wage reporting and some restaurants were not making up for the money they owed their employees.[25] This led to $5.5 million in back pay and $2.5 million in penalties.[25]

There is the concept that when it comes to increasing pay in limited time restaurants or positions, there will be a decrease in employment which can hurt the overall restaurant and even the service industry as a whole.[27] This research also shows the breakdown of who and what job position is in the category for making less than minimum wage and those that are making minimum wage.[27] For example, within a chart given, the tipped occupations are waitstaff, bartenders, and attendants. On the other side, those that are non-tipped occupations are cashier, cook, dishwasher, food-service managers, and counter attendants. According to the chart, waitstaff is the highest percentage of those that are less than minimum wage at 44%.[27]

Opponents

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An opponent is the National Restaurant Association (NRA). The NRA pushes to keep tipped minimum wage on a federal level.[28] This group believes that if minimum wage were to increase for every employee, then restaurants would be forced to raise the prices on their menu which could lead to restaurant closure.[28] The NRA argues about how the increase of minimum wage would affect those restaurants after the ending of the pandemic. Most restaurants in a study by the NRA stated that they would not be able to financially recover after the hit of the pandemic and the struggles that they already had to deal with because of the lockdowns.[28] Employee benefits would also be in jeopardy of being cut and changed.[28]

Research from the NRA regarding the Federal Reserve Bank in Minneapolis states that in 2018 and 2019, full-service and limited-service restaurant jobs declined by 12% and 18%.[28] Also, that worker earnings decreased 8% and 11% at full-service and limited service restaurants.[28] This economic impact is within a year or two of a law being passed that increased the minimum wage in 2017. Minnesota, where Minneapolis is located, is one of few states that currently has state minimum wage as the standard for tipped restaurant workers.

See also

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References

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Revisions and contributorsEdit on WikipediaRead on Wikipedia

Tipped wage

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from Grokipedia
The tipped wage refers to a subminimum cash wage paid by employers to employees in tipped occupations under the U.S. Fair Labor Standards Act (FLSA), where the federal base rate stands at $2.13 per hour as of its last adjustment in , supplemented by customer gratuities to reach or exceed the standard federal of $7.25 per hour through a mechanism known as the tip credit. This applies to workers customarily receiving over $30 monthly in tips, primarily in sectors like restaurants, bars, and delivery services, with employers obligated to cover any shortfall if tips fall short. Enacted via 1966 FLSA amendments to accommodate tipping customs, the policy has persisted largely unchanged federally, though approximately half of states eliminate the tip credit by mandating full payment before tips. The system incentivizes through direct feedback via tips, which empirical data show often elevate total above minimum levels for many workers—averaging $13–$18 hourly in full-service restaurants—but introduces volatility tied to factors like shift busyness, demographics, and economic conditions, resulting in frequent shortfalls and reliance on employer makeup pay. State-level variations reveal that abolishing the tip credit correlates with higher average tipped worker incomes, as seen in analyses of data from "full " jurisdictions, though causal effects remain debated due to confounding variables like regional and industry density. Controversies center on exploitation risks, including widespread —where employers fail to remit tip credits—and elevated rates among tipped employees, who face twice the non-tipped incidence, alongside documented disparities in tip allocations by server race and that amplify income inequality. Proponents of retention argue it sustains higher and hours in labor-intensive sectors without disemployment effects observed in broader hikes, per county-level studies of policy shifts, while critics highlight associations with and advocate phase-out to enforce baseline security, citing minimal job loss in states that have implemented full wages. Recent federal proposals and initiatives reflect this tension, balancing service incentives against of uneven worker protections.

Core Concept and Criteria

A tipped wage refers to a compensation structure under the U.S. Fair Labor Standards Act (FLSA) in which employers may pay a reduced cash wage to certain employees, with the expectation that tips received by the employee will supplement earnings to meet or exceed the federal of $7.25 per hour. This system, known as the tip credit, allows employers to claim a credit of up to $5.12 per hour against obligations, meaning the minimum direct cash wage is $2.13 per hour, provided tips cover the remainder. If tips plus the cash wage fall short of $7.25 per hour, the employer must pay the difference to ensure compliance. The core criterion for classifying an employee as tipped under the FLSA is engagement in an occupation where the employee customarily and regularly receives more than $30 per month in tips. "Customarily and regularly" implies tips are a standard feature of the role, such as for servers, bartenders, or staff, rather than incidental or sporadic. Occupations like cooks or dishwashers typically do not qualify unless tips are routinely received above the threshold, as determined by the nature of duties rather than employer designation. To utilize the tip credit, employers must meet specific obligations: notify tipped employees in advance of the tip credit provision, including the cash wage amount and tip credit claimed; ensure employees retain all tips except for mandatory, employee-only tip pooling; and maintain accurate records of hours worked, tips received, and wages paid. Failure to inform employees voids the tip credit, requiring full payment from the employer. Tip pooling is permissible only among tipped employees performing tip-generating work and cannot include managers, supervisors, or non-tipped staff. These criteria ensure tips directly benefit the employee performing customer-facing, tip-eliciting duties, aligning with the FLSA's intent to protect low-wage workers while accommodating service industry norms.

United States Federal Requirements

Under the Fair Labor Standards Act (FLSA), a tipped employee is defined as any employee engaged in an occupation where they customarily and regularly receive more than $30 per month in tips. This threshold establishes eligibility for the federal tip credit provision, which applies to occupations such as waitstaff, bartenders, and certain delivery personnel where tipping is a standard practice. Employees must retain all tips they receive, except in permissible tip pooling arrangements limited to other tipped employees. Federal law permits employers to pay tipped employees a direct cash wage of at least $2.13 per hour, with the employer claiming a tip credit of up to $5.12 per hour toward the federal of $7.25 per hour. The combination of the employee's tips and the direct cash must equal or exceed $7.25 per hour for each hour worked; if tips fall short, the employer is obligated to provide additional compensation to meet this total. This tip credit mechanism, codified in Section 3(m) of the FLSA, has remained unchanged since the federal was set at $7.25 per hour in 2009. Employers taking the tip credit must notify tipped employees in advance of the amount of the credit, the cash wage being paid, and that the employee retains all tips except for valid tip pools. Tips received by the employee count toward the only if they are reported to the employer for purposes, as unreported tips do not satisfy the employer's obligations. For overtime, the regular rate includes the direct plus the tip credit amount, requiring compensation on that base exceeding 40 hours per week. Employers are prohibited from retaining any portion of employees' tips or allowing managers or supervisors to share in tip pools, a restriction reinforced by amendments to the FLSA in 2018. These requirements apply to enterprises covered by the FLSA, including those with annual gross sales exceeding $500,000 or engaged in interstate commerce, though some small businesses may be exempt. Violations can result in back assessments, civil penalties up to $1,000 per violation for willful non-compliance, and potential criminal prosecution. The U.S. Department of Labor enforces these provisions through investigations and maintains that the tip credit incentivizes tipping while ensuring a floor, though empirical data on compliance shows persistent shortfalls in some sectors due to underreporting and misclassification.

State-Level Variations in the US

In the , state laws on tipped wages diverge from the federal standard under the Fair Labor Standards Act, which allows employers to pay a cash of $2.13 per hour to tipped employees while claiming a tip credit of up to $5.12 to reach the $7.25 . States may impose higher cash wages, limit or adjust tip credits to align with elevated state , or eliminate tip credits altogether, requiring full payment irrespective of tips. As of July 31, 2025, 43 states plus the District of Columbia and territories permit tip credits with varying cash wages, while seven states prohibit them entirely. States disallowing tip credits mandate that employers pay the full state minimum wage as cash compensation to tipped workers, treating tips as additional earnings not offsetting base pay. This policy applies in (13.00perhour),[California](/page/California)(13.00 per hour), [California](/page/California) (16.50), (11.13),[Montana](/page/Montana)(11.13), [Montana](/page/Montana) (10.55 for businesses with over $110,000 annual sales; $4.00 for smaller ones), ($12.00), (standard $15.05; Portland metro $16.30; non-urban $14.05), and Washington (16.66).[](https://www.dol.gov/agencies/whd/state/minimum−wage/tipped)[Guam](/page/Guam)(16.66).[](https://www.dol.gov/agencies/whd/state/minimum-wage/tipped) [Guam](/page/Guam) (9.25) follows a similar no-credit rule as a .
State/TerritoryCash Wage (Full Minimum, No Tip Credit)
$13.00
$16.50
$9.25
$11.13
Montana (> $110k sales)$10.55
Montana (≤ $110k sales)$4.00
$12.00
Oregon (standard)$15.05
Oregon (Portland metro)$16.30
Oregon (non-urban)$14.05
Washington$16.66
In states allowing tip credits, the required cash wage spans from the federal $2.13 (e.g., , where total must reach $7.25) to substantially higher figures like $12.75 in (with $1.25 credit to $14.00 total) or $11.79 in (with $3.02 credit to $14.81 total). Employers must ensure tips plus cash wage meet or exceed the state minimum, with credit amounts calibrated accordingly; for instance, requires $9.00 cash plus up to $6.00 credit for $15.00 total, while mandates $9.98 cash plus $3.02 credit for $13.00 total. Additional variations include employer size thresholds, such as Ohio's $5.35 cash wage for businesses with over $394,000 in annual sales (credit to $10.70 total), and regional or occupational differences, as in Connecticut's $6.38 cash for / workers (with $9.97 credit to $16.35 total) or New York's tiered rates by upstate/downstate and scale. These configurations reflect state-specific legislative choices balancing employer costs, worker base pay, and tip supplementation.

Historical Development

Origins in Post-Civil War America

The practice of tipping, whereby customers provide gratuities to service workers in addition to or in lieu of employer-paid wages, gained prominence in the United States after the Civil War (1861–1865), as affluent Americans returning from European travels adopted the custom of offering "vails" to servants. Prior to this period, tipping was uncommon and often viewed as an aristocratic import inconsistent with American egalitarian values, but post-war urbanization and expansion of hospitality industries facilitated its spread, particularly in railroads, hotels, and restaurants. Employers in these sectors began structuring compensation around tips to minimize base pay, shifting the financial burden of labor costs to patrons. This model disproportionately affected newly emancipated African Americans, who filled many service roles in the post-emancipation South and national rail lines, such as Pullman porters—who earned a base salary of approximately $27.50 per month in 1915 (equivalent to about $835 in 2024 dollars)—with tips constituting the primary income source. Restaurant and rail operators embraced tipping to employ freed Black workers without committing to full wages, effectively replicating low-cost labor dynamics in a nominally free market; historical accounts describe employers paying little to nothing in base compensation, relying entirely on customer gratuities to sustain workers. By the late , tipping had become entrenched in these industries, enabling employers to control labor expenses amid growing demand for services, though it reinforced social hierarchies—contemporary observers noted greater acceptance of tipping workers as a marker of compared to white ones. Economic pressures, including the shift to the "European plan" in hotels (separating room rates from meals) and urban migration, further normalized tip-dependent pay structures before any federal regulations existed.

Key Legislative Milestones (1938–Present)

The Fair Labor Standards Act (FLSA) of 1938 established a federal of $0.25 per hour and requirements but required employers to pay the full to covered tipped employees, with tips treated as supplemental rather than creditable toward the obligation. Initial coverage under the FLSA excluded many service industry workers reliant on tips, such as those in restaurants and hotels, limiting its immediate impact on tipped wages. The 1966 amendments to the FLSA (P.L. 89-601) introduced the tip credit mechanism for the first time, allowing employers to pay tipped employees a cash wage of at least 50% of the federal (initially $1.00 per hour, rising to $1.60 by 1968), provided that tips plus cash wages met or exceeded the full . This change expanded minimum wage coverage to previously exempt service and retail workers while recognizing tips as a component of compensation, with employers required to make up any shortfall. Subsequent FLSA amendments in (P.L. 93-259) and (P.L. 95-151) refined tip credit procedures, including requirements for employers to notify tipped employees of the tip credit arrangement and certify compliance, while maintaining the 50% cash wage floor relative to the rising federal (reaching $2.65 by 1978). The 1977 changes also raised the monthly tip threshold for eligibility from $20 to $30 and phased minimum wage increases to $3.35 by 1981, with tipped cash wages scaling accordingly under the 50% rule. The Small Business Job Protection Act of 1996 (P.L. 104-188) decoupled the tipped cash wage from a percentage of the , establishing a fixed federal cash wage of $2.13 per hour for tipped employees (effective since 1991 but formalized), with the tip credit capped at the difference to the full of $5.15 at the time. This structure has remained unchanged, even as the federal rose to $7.25 in 2009, leaving the tipped cash wage frozen and requiring tips to cover the larger gap. In 2018, section 4205 of the Consolidated Appropriations Act (P.L. 115-141) amended the FLSA to prohibit employers from retaining any portion of employees' tips, irrespective of whether a tip credit is taken, while permitting tip pooling among customarily tipped employees only. This addressed concerns over employer retention practices but did not alter the $2.13 cash or tip credit framework. No further federal legislative changes to the core tipped structure have occurred as of 2025, though proposals like H.R. 5112 to eliminate the tip credit entirely remain pending.

International Comparisons

Global Tipping Norms

Tipping practices vary significantly across countries, often reflecting differences in labor laws and wage structures for service workers. In regions where tipping is customary and substantial, such as , it frequently supplements a sub-minimum base , allowing employers to credit tips toward legal requirements. Conversely, in much of , , and , tipping is minimal or discouraged, with service industry employees receiving full minimum wages or higher guaranteed pay, reducing dependence on gratuities. These norms influence service quality and worker income stability, as tip-reliant systems introduce variability absent in fixed-wage models. In , tipping is generally not expected as a primary source, with many countries including a service charge (e.g., 10-15%) in bills or relying on rounding up for good service. exemplifies this, where bills already incorporate service, and additional tipping is rare due to high base wages for waitstaff. Servers across the typically earn the full national without tip credits, such as the UK's £11.44 per hour as of 2024, ensuring compensation independent of customer discretion. In contrast to the U.S. model, this structure stems from post-World War II labor policies that extended protections to service roles, fostering more predictable earnings. Asia largely rejects tipping as a norm, viewing it as potentially insulting to service pride or redundant with structured pay. prohibits or discourages tips in restaurants and hotels, where workers receive competitive salaries emphasizing excellence without gratuities; offering cash directly can offend cultural values of self-sufficiency. In , historical aversion persists, though urban tourism areas may accept small amounts for porters, but service wages do not rely on them. follows suit, with no expected restaurant tips, as base pay meets living standards without supplementation. In and parts of , tipping hovers around 10% in tourist-heavy nations like or the , sometimes supplementing modest wages but less rigidly than in the U.S. and eschew tipping entirely, with hospitality minimums (e.g., Australia's $24.10 per hour casual rate as of 2024) covering full compensation, leading to consistent service without tip incentives. Globally, about 66 countries recommend 10% for restaurants per aggregated data, while 88 expect none for taxis, highlighting cultural divergence from tip-dependent economies.

Wage Policies Outside the US

In most countries outside the United States, labor laws mandate that employers pay tipped workers the full statutory minimum wage, treating tips as additional, non-wage income rather than a mechanism to offset base pay obligations. This contrasts with the U.S. tip credit system, where base wages can fall below the general minimum if tips make up the difference. Such policies aim to ensure baseline income stability for service workers, with tipping customs varying culturally but not legally substituting for wages. In the , employers cannot use tips or service charges to meet the or requirements; workers must receive the full hourly rate excluding gratuities. As of April 2025, the for workers aged 21 and over stands at £11.44 per hour, while the for those aged 18-20 is £8.60 per hour. The Employment (Allocation of Tips) Act 2023, effective from October 1, 2024, requires businesses to distribute 100% of tips, gratuities, and service charges directly to relevant staff via fair policies, with limited exceptions for administrative costs not exceeding overall tip volumes; non-compliance can result in enforcement by . Australian law under the prohibits reliance on tips to fulfill entitlements, requiring payment of the national or applicable rates regardless of gratuities received. Effective July 1, 2025, the national is $24.95 per hour for employees not covered by awards or agreements, with hospitality workers often entitled to higher industry-specific rates through modern awards. Tipping remains uncommon and voluntary, reflecting strong wage protections and penalty rates for weekend or work that elevate total compensation. In Canada, tipped wage policies differ by province, but most mandate full minimum wage payment exclusive of tips. For instance, Ontario's general minimum wage rose to $17.60 per hour on October 1, 2025, applying uniformly to tipped roles without a sub-minimum; British Columbia's rate is $17.85 per hour as of June 1, 2025, also without tip offsets. Quebec is an exception, permitting a reduced base wage of $12.90 per hour for tipped employees as of May 1, 2025, provided total remuneration—including declared tips—meets or exceeds the general minimum of $16.10 per hour, with employers obligated to supplement shortfalls. European Union member states generally eschew tip credits, enforcing full minimum wages or sector-specific collective agreements for workers, where tips function as discretionary bonuses. France's salaire minimum interprofessionnel de croissance (SMIC), adjusted periodically for , applies equally to tipped occupations at €11.65 per hour gross as of 2024, without reductions for gratuities. Similarly, in —where tipping norms are stronger but not wage-substitutive—servers earn at least the statutory minimum of €12.41 per hour since October 1, 2022, under the Minimum Wage Act, with tips taxed separately as income. These frameworks prioritize wage floors over tip dependency, though enforcement varies by national labor codes.

Operational Mechanics

Tip Credits and Employer Obligations

Under the Fair Labor Standards Act (FLSA), a tip credit permits employers to pay tipped employees a cash wage of at least $2.13 per hour while claiming a credit of up to $5.12 per hour toward the federal of $7.25 per hour, provided the employee's tips and cash wages combined equal or exceed the for all hours worked in a workweek. A tipped employee is defined as one who customarily and regularly receives more than $30 per month in tips. If tips fall short of the required amount, the employer must provide additional compensation to meet the threshold. Employers must notify tipped employees in advance of taking a tip credit, specifying the cash wage amount, the maximum tip credit, that tips will satisfy the obligation, the requirement for employees to retain all tips (except for valid tip pooling), and, if applicable, the tip pool contribution amount. This notification may be provided orally or in writing but must occur prior to the tip credit's application. Employers bear the burden of ensuring compliance with and requirements using tips, including maintaining accurate records of hours worked, cash wages paid, and tips reported by employees on a weekly or monthly basis as per 29 CFR § 516.28. Tips cannot be used for any purpose other than satisfying the employer's or obligations, and employers, managers, or supervisors are prohibited from retaining any portion of employees' tips. In cases of mandatory tip pooling when claiming a tip credit, participation is limited to employees who customarily and regularly receive tips, with distributions required promptly—typically by the next regular payday—and notification of contribution amounts mandatory. Violations, such as unauthorized tip retention, can result in civil money penalties under FLSA amendments effective November 23, 2021.

Reporting, Taxation, and Tip Pooling

Under the Fair Labor Standards Act (FLSA) and Internal Revenue Service (IRS) guidelines, tipped employees in the United States are required to report all cash tips totaling $20 or more received in a calendar month to their employer by the 10th day of the following month. Employers must then include these reported tips as wages on Form W-2, withholding applicable federal income tax, Social Security, and Medicare taxes. Employees maintain daily records of tips using forms such as Form 4070A (Employee's Daily Record of Tips) and submit a monthly summary via Form 4070 (Employee's Report of Tips to Employer). Non-cash tips, such as tickets or passes, are not reported to employers but must be valued at fair market value and included on the employee's individual tax return. Unreported tips are reconciled by employees on Form 4137 (Social Security and Medicare Tax on Unreported Tip Income) attached to their Form 1040. All tips constitute taxable income subject to federal income taxes, FICA taxes (Social Security and Medicare), and FUTA taxes, treated as supplemental wages by employers for withholding purposes. As of tax year 2025, the "No Tax on Tips" provision, enacted under the One Big Beautiful Bill Act and implemented via IRS proposed regulations, permits tipped employees and self-employed individuals to deduct up to $25,000 in qualified cash tips from federal income tax liability, though reporting and FICA obligations remain. This deduction applies to tips reported to employers and is available through 2028, targeting workers in customary tipping occupations like servers and bartenders, but excludes tips exceeding the cap or those from non-qualified sources. State-level taxation varies, with some states conforming to federal rules while others impose additional requirements or exemptions. Tip pooling, or tip sharing, is regulated under FLSA Section 3(m)(2), which prohibits employers, managers, or supervisors from retaining any portion of employees' tips for any purpose, including operational costs. Valid tip pools must distribute tips only among employees who customarily and regularly receive tips, such as servers and bussers; for employers claiming a tip credit against , participation is restricted to front-of-house tipped staff, excluding back-of-house roles like cooks unless the employer pays full without credit. The U.S. Department of Labor (DOL) reaffirmed in January 2025 opinion letter FLSA2024-02 that managers and supervisors are barred from tip pool participation under all circumstances, even if performing non-supervisory duties, to prevent or . Employers implementing pools must notify employees in advance of the arrangement and ensure distributions are proportional to hours worked or another reasonable formula, with violations subject to back wages and penalties. State laws may impose stricter limits, such as California's on mandatory pooling altogether.

Empirical Evidence

Worker Earnings and Income Distribution

Tipped workers , particularly waiters and , earn a hourly of $16.23 including tips and base pay, as reported by the for May 2024. This figure reflects total compensation, with tips historically comprising 50-60% of earnings for servers and bartenders, though the proportion has decreased in recent years due to rising base wages in some sectors. annual earnings for these occupations stand at approximately $33,760, exceeding the federal of $7.25 per hour but varying significantly by state and establishment type. Earnings among tipped workers display substantial variability, influenced by factors such as geographic location, volume, shift timing, and individual service , which tips reward directly. This variability contributes to a skewed within the sector, where high-performing servers in upscale or busy venues can exceed $20-25 per hour on average, while those in slower or lower-end establishments may fall closer to or occasionally below the effective after accounting for tip shortfalls. Aggregated tip data from surveys indicate that monthly tip medians around $867 for wait staff, but daily fluctuations can lead to instability, with some workers reporting effective hourly rates ranging from $11 to $28 depending on circumstances. The tipped wage structure, enabled by tip credits allowing employers to pay a sub-minimum cash wage (as low as $2.13 federally), affects overall by tying a large share of compensation to rather than fixed payments. Empirical analyses show that a 10% increase in the tipped cash correlates with roughly a 1% rise in total earnings for full-year tipped workers relative to non-tipped counterparts, potentially reducing family-level risk with an elasticity of about -0.2. However, other studies find no significant net earnings gains from reducing tip credits, as reductions offset wage hikes, leaving average tipped worker unchanged or diminished. Within restaurants, the system concentrates higher earnings among customer-facing tipped roles like servers compared to non-tipped back-of-house positions such as cooks, whose median hourly wages hover around $16 without tip supplementation, fostering intra-firm income disparities. Tipped workers overall occupy a higher poverty risk profile than some non-tipped service occupations due to earnings volatility, with restaurant tipped staff overrepresented at the lower end of the national earnings distribution. States eliminating tip credits, mandating full minimum wages before tips, show comparable total server earnings to tip-credit states, suggesting customer tipping adjusts downward to maintain equilibrium, with minimal impact on broad income distribution but potential shifts toward greater stability for lower earners.

Employment and Industry Effects

Empirical studies examining the impact of tipped policies on in the and sectors have produced mixed but predominantly negative findings regarding job creation or retention for tipped workers. A NBER of state-level variations in tip credit allowances found that reducing or eliminating tip credits—effectively raising the wage employers must pay tipped employees—leads to fewer overall jobs for tipped workers, with no significant offsetting increase in for those remaining employed. This disemployment effect arises from higher labor costs prompting restaurants to reduce levels, particularly in full-service establishments where servers comprise a large share of tipped labor. Similarly, an earlier study using interstate policy differences estimated that a 10% increase in the tipped correlates with small but statistically insignificant declines in hours, though rise modestly by about 0.4%. In states that prohibit tip credits entirely—such as , , and Washington, where employers must pay the full state regardless of tips—employment data from the 2020s reveal no clear expansion in tipped positions relative to tip-credit states, and some evidence of contraction during labor cost spikes. For instance, analyses of data indicate that employment growth in no-tip-credit states lagged behind national averages following hikes in the early 2020s, with full-service restaurants experiencing slower recovery post-pandemic due to elevated wage floors compressing profit margins. These policies shift hiring toward non-tipped roles or automated service models, reducing demand for traditional server positions; a 2024 projection for estimated that phasing out the subminimum tipped wage could raise industry labor costs by approximately 2%, potentially resulting in job reductions or closures among smaller operators. Broader industry effects include altered firm strategies, such as increased reliance on counter-service or fast-casual formats that minimize tipped labor exposure. Research on increases, including those affecting tipped sectors, documents revenue declines averaging 2.3% in affected restaurants, with heterogeneous impacts: larger chains adapt via adjustments, while independent venues face higher closure risks. Tipped wage structures thus sustain higher in tip-dependent roles by aligning pay with customer-driven , whereas mandated higher base wages incentivize labor substitutions that reshape industry composition toward less tip-reliant operations. Longitudinal data from the and affirm that states retaining tip credits exhibit more stable server densities compared to those without, underscoring a causal link between flexible wage floors and sustained job availability in service-oriented subsectors.

Impacts on Service Quality and Productivity

Empirical research indicates a positive but modest between perceived and tip amounts in restaurants, suggesting that tipping provides some for workers to enhance customer experiences. A of 14 studies encompassing 2,645 dining parties across 21 restaurants found that accounts for less than 2% of the variability in tip sizes, with an average of approximately 0.13. This weak linkage implies limited sensitivity of tips to service variations, potentially diminishing their motivational power for consistent quality improvements. Within-subjects analyses, which control for individual tipper biases by tracking repeated dining experiences, confirm that higher service ratings predict larger tips, with an average 2% increase in tip percentage per one-point rise on a five-point service scale. Such findings support the theoretical role of tipping in aligning worker effort with under tipped wage structures, where base pay is supplemented by performance-linked gratuities. However, the overall tenuous relationship raises questions about tipping's efficacy as a primary driver of superior service, as workers may prioritize factors like table turnover or —behaviors that boost tips independently of holistic quality—over sustained attentiveness or customization. Direct evidence on , measured as output per worker such as tables served or generated, remains sparse but aligns with patterns. Tipped systems encourage individualized effort, potentially elevating metrics like per shift, as servers respond to direct financial feedback from patrons rather than fixed wages. In contrast, low tip sensitivity could foster variability in output, with high-tip environments spurring productivity gains while low-tip scenarios lead to minimal effort, akin to ", minimum effort" dynamics observed in non-tipped roles. Experimental and observational data do not conclusively demonstrate broad productivity boosts from tipped wages, underscoring that while incentives exist, their impact on efficiency is constrained by inconsistent reward structures and external factors like policies or customer demographics.

Debates and Perspectives

Economic Advantages and Market Incentives

The tipped wage system aligns worker compensation directly with customer evaluations of , creating market-driven incentives for enhancements in labor-intensive sectors like restaurants. Empirical analyses, including within-subjects experiments controlling for individual tipper variability, demonstrate a reliable positive between perceived service quality ratings and tip amounts, indicating that tipping functions as a performance-based reward mechanism. Similarly, econometric models confirm that tips improve service outcomes when sufficiently responsive to quality variations, as evidenced by customer behaviors rewarding superior performance with higher gratuities. This direct linkage reduces reliance on employer monitoring, fostering efficiency in competitive markets where repeat business and word-of-mouth depend on consistent service excellence. Tipped workers typically achieve higher total earnings than the federal minimum wage, with median hourly wages for waiters and waitresses reaching $15.36 in 2023, inclusive of tips, compared to the $7.25 base. Aggregated data further reveal average hourly earnings of $15.51 for tipped employees, often exceeding twice the , with top performers reporting up to $84 per hour on peak shifts. Tipped workers also exhibit a 20% lower rate than other minimum-wage earners, attributing this to the upside potential of variable pay that rewards skill and effort. Such outcomes reflect market incentives where high performers capture disproportionate rewards, enabling mobility absent in fixed-wage structures. Tip credits, which permit employers to offset base wages with anticipated tips, lower fixed labor costs and support expanded in the sector. utilizing quarterly from 1990 to 2019 estimates an elasticity of -0.08 for tipped increases (equivalent to reduced tip credits), implying that larger credits sustain approximately 1-2% more jobs among tipped workers without diminishing average for incumbents. This cost flexibility allows businesses to hire additional staff during variable demand periods, mitigating risks of understaffing and enhancing operational in cyclical industries. Overall, the system promotes by tying pay to observable outputs——while enabling employers to manage payroll volatility through tip reliance, a echoed by 97% of tipped workers who favor it over alternatives. In practice, failed experiments with no-tip models often revert to tipping due to sustained worker and customer support for its incentive properties, underscoring its role in equilibrating for high-quality service labor.

Criticisms Including Exploitation Risks

Critics argue that the tipped wage system, which permits employers to pay a federal subminimum wage of $2.13 per hour since 1991 while requiring tips to supplement to the full minimum of $7.25 per hour, shifts the primary responsibility for worker compensation from employers to customers, creating inherent risks of underpayment when tips fall short. Employers are legally obligated to cover any shortfall, yet enforcement data from the U.S. Department of Labor indicate persistent noncompliance, with restaurants classified as a low-wage, high-violation industry for wage and hour breaches. A study analyzing Department of Labor investigations found that approximately 84% of probed restaurants violated tipped wage provisions, often through improper tip pooling or failure to remit shortfalls. Wage theft is amplified in tipped sectors, where workers report systemic issues like mandatory tip sharing with non-tipped staff or retention of tips by managers. Surveys indicate that 35% of tipped employees experienced wage theft in the year prior to 2021, affecting an estimated 2.4 million workers amid recovery pressures. Federal recoveries for stolen wages reached over $1.5 billion from 2021 to 2023, with tipped industries contributing significantly due to opaque reporting and reliance on voluntary declarations. This opacity exploits workers' economic , as hourly earnings including tips for waitstaff hovered at $10.11 in 2018 , with tips comprising over 58% of , rendering base pay insufficient as a safety net. The system's structure heightens exploitation through customer dependency, particularly exposing workers—predominantly women, who hold two-thirds of tipped restaurant roles—to elevated risks of sexual harassment. Research links subminimum wages to increased tolerance of abuse, as workers fear tip losses from confrontation; 66% of female restaurant employees reported managerial harassment, with tipped positions showing higher incidence than non-tipped ones. In states adhering to the federal tip credit, tipped workers face 13.8% poverty rates in key industries, versus 10.2% in states mandating full minimum wages, exacerbating gender and racial disparities where women and minorities receive lower tips on average. Academic analysis confirms that tip reliance without stable base pay disproportionately harms women via income instability and harassment vulnerability, as economic pressure incentivizes endurance of discriminatory behavior. Income unpredictability further compounds risks, with tips subject to seasonal, economic, or customer fluctuations—evident in post-2020 declines where base wages rose to 43% of pay amid shrinking tip values—leaving workers without reliable floors for essentials like or healthcare. Critics, including labor economists, contend this fosters a causal chain of exploitation: low draw vulnerable labor pools, while weak incentives for employer in or retention perpetuate high turnover and substandard conditions.

Social and Cultural Dimensions

The tipped wage system reinforces cultural norms of customer sovereignty in service interactions, positioning patrons as arbiters of through discretionary gratuities, a practice ingrained in U.S. where 29% of adults view tipping as an and 49% as context-dependent. This dynamic fosters expectations of performative from servers, who must navigate to maximize tips, often blurring professional boundaries and embedding subservience into everyday exchanges. Sociologically, such reliance on interpersonal can heighten vulnerability to , as workers' earnings hinge on customer perceptions of attractiveness or amiability, with studies linking tip-dependent roles to elevated risks of in settings. Demographically, tipped occupations skew toward women, who comprise over two-thirds of such workers, alongside disproportionate representation of people of color and immigrants, amplifying social inequities tied to historical labor patterns post-Civil War when tipping supplemented substandard wages for freed individuals in service roles. Empirical analyses reveal persistent in tipping, with servers receiving tips 2-3 percentage points lower than white counterparts for equivalent service, even after controlling for bill size, composition, and diner demographics, underscoring customer biases that widen earnings gaps along racial lines. Gender intersections compound this, as women of color in tipped jobs report higher poverty persistence and strains, including depression and anxiety, compared to non-tipped peers, attributable to income volatility and social stigma of tip reliance. Culturally, the system's evolution from optional reward to near-mandatory expectation—driven by digital prompts and social pressure—has sparked backlash, with 72% of Americans perceiving expanded tipping solicitations beyond traditional service, eroding voluntary reciprocity and framing non-tippers as socially deviant. Tip pooling practices further strain , exacerbating divides by race and as higher-tipped servers subsidize others, perpetuating intra-class tensions in an industry where earnings reflect not just effort but ascribed social traits. These dimensions highlight how tipped wages embed economic dependence within cultural scripts of , contrasting with non-tipping norms in much of and where service pricing internalizes compensation, reducing interpersonal power imbalances.

Recent Reforms and Proposals

State and Local Policy Shifts (2020s)

In Chicago, Illinois, the City Council approved an ordinance on October 25, 2023, initiating a five-year phase-out of the tip credit for tipped workers, effective , 2024. This reduced the allowable tip credit from 40% to 32% of the city ($16.20 per hour as of , 2024), raising the minimum cash for tipped employees to approximately $11.02 per hour initially, with further reductions scheduled annually until full elimination by , 2028. By , 2025, the tipped minimum cash increased to $12.62 per hour amid the ongoing phase-out, aligning with the city's standard minimum of $16.60 for larger employers. The policy, advocated by groups like One Fair Wage, aims to ensure tipped workers receive the full before tips, though restaurant owners have reported potential cost increases and staffing challenges. Washington, D.C., voters approved Initiative 82 on November 8, 2022, with 85% support, mandating a phase-out of the tip credit by July 1, 2027, starting with an increase from $5.35 to $8 per hour in 2023 and annual increments to match the full (projected at $17 by 2027). The measure, part of the "One Fair Wage" movement, sought to address wage disparities but faced opposition from restaurant associations citing job losses. On July 28, 2025, the D.C. Council voted 7-5 to amend the initiative, slowing the phase-out, capping future increases, and restoring limited tip credit allowances, setting the tipped minimum at $10 per hour temporarily amid business closures and worker protests. Critics, including labor advocates, described the revision as undermining voter intent, while supporters argued it balanced economic pressures on small businesses. In , a 2018 ballot initiative to raise the and eliminate the tip credit was modified by the in February 2025, preserving the tip credit while accelerating the overall minimum to $15 per hour by February 2027. The compromise raised the tipped cash minimum to $4.74 per hour (38% of the standard $12.48 rate as of February 21, 2025), with plans to increase it to 50% of the full minimum by 2027, avoiding full phase-out despite advocacy for elimination. This adjustment followed industry against projected failures, maintaining the structure where tips supplement the cash wage to meet or exceed the full minimum. Other localities saw proposals but limited enactments; for instance, considered phasing out the tip credit in 2025 legislation, but it stalled amid opposition from business groups. These shifts reflect broader debates over balancing worker protections with sector viability, with no additional states fully eliminating tip credits in the decade beyond pre-existing no-tip-credit policies in seven states (, , , , , , Washington).

Federal Initiatives and Ongoing Debates

Under the Fair Labor Standards Act (FLSA), employers of tipped workers—defined as those who customarily and regularly receive more than $30 per month in tips—may pay a cash wage as low as $2.13 per hour, with tips required to supplement earnings to at least the federal of $7.25 per hour; if tips fall short, employers must cover the difference via the tip credit mechanism. This structure, unchanged since 1991 for the cash wage despite multiple adjustments to the full minimum, has prompted federal legislative efforts to phase out or eliminate the subminimum for tipped employees, particularly in hospitality sectors. Prominent recent initiatives include the Raise the Wage Act of 2025, introduced in the U.S. House and supported by Senators and along with 175 colleagues, which proposes gradually increasing the federal to $17 per hour by 2030 while eliminating the tipped subminimum wage over seven years to ensure all workers receive the full rate regardless of tips. Similarly, the Tipped Income Protection and Standards (TIPS) Act, introduced by Representative in September 2024, seeks to abolish the subminimum wage for tipped service workers and eliminate federal taxes on tips to boost take-home pay without relying on employer guarantees. Other proposals, such as the Tipped Employee Protection Act (H.R. 2312), reintroduced by Representative in March 2025 and sponsored by House Republicans, modify the FLSA's definition of a "tipped employee" by excluding considerations of non-tipped duties to broaden subminimum wage eligibility, prevent misclassification in dual-job scenarios, and protect tip pools from non-tipped duties; the bill was scheduled for a House floor vote in January 2026 but withdrawn. These bills reflect broader pushes, including bicameral efforts by Senator and 178 colleagues in April 2025 to tie subminimum elimination to hikes, amid stalled comprehensive reforms. Ongoing federal debates center on balancing worker protections against potential industry disruptions, with proponents arguing that the subminimum perpetuates and wage theft—evidenced by Department of Labor data showing frequent tip shortfalls requiring employer makeup payments—and that elimination would align tipped earnings more reliably with full minimum standards, as projected to benefit nearly 22 million low-wage workers without net job losses based on elasticity estimates. Critics, including restaurant industry advocates, contend that removing the tip credit could reduce overall tips due to customer expectations of lower base wages subsidizing service incentives, potentially leading to higher menu prices, reduced hours, or closures in tip-dependent sectors; some proposals counter this by pairing subminimum bans with tip tax exemptions to preserve . Debates also highlight regulatory ambiguities, such as Fifth Circuit rulings challenging dual-job rules that mandate full minimum pay for non-tipped tasks, fueling calls for clearer FLSA interpretations to avoid litigation burdens on small businesses. As of January 2026, none of these bills have advanced beyond introduction amid partisan divides, with federal action lagging state-level experiments that inform projections of minimal employment impacts from subminimum phaseouts.

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  105. https://www.epi.org/blog/conservative-michigan-lawmakers-are-threatening-to-undermine-minimum-wage-increases-for-tipped-workers/
  106. https://detroit.eater.com/2025/3/11/24382547/michigan-minimum-wage-law-increase-sick-leave-one-fair-wage-explained
  107. https://www.redbanklegal.com/2025/06/10/nj-bill-to-eliminate-tip-credit-what-restaurant-workers-need-to-know/
  108. https://newjerseymonitor.com/2025/04/10/bill-to-end-tipped-wage-credits-meets-broad-opposition/
  109. https://www.workforcepayhub.com/blog/minimum-wage-and-tip-compliance
  110. https://hayes.house.gov/2025/9/hayes-introduces-legislation-to-ensure-workers-recieve
  111. https://www.help.senate.gov/dem/newsroom/press/news-sanders-scott-175-colleagues-introduce-bill-to-raise-minimum-wage-to-17-by-2030-benefitting-nearly-22-million-americans
  112. https://www.epi.org/publication/rtwa-2025-impact-fact-sheet/
  113. https://norcross.house.gov/2024/9/rep-norcross-introduces-tips-act-to-eliminate-subminimum-wage-and-taxes-on-tips-for-service-workers
  114. https://womack.house.gov/news/documentsingle.aspx?DocumentID=408982
  115. https://www.congress.gov/bill/119th-congress/house-bill/2312
  116. https://news.bloomberglaw.com/daily-labor-report/gop-spikes-legislation-widening-tipped-worker-wage-loophole
  117. https://www.gillibrand.senate.gov/news/press/release/gillibrand-joins-178-colleagues-in-introducing-bill-to-raise-federal-minimum-wage-to-17-by-2030/
  118. https://www.theguardian.com/business/2025/feb/25/nevada-end-taxes-on-tips
  119. https://www.jacksonlewis.com/insights/back-future-core-wage-hour-concerns
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