Tip Credit

What Is a Tip Credit?

A tip credit is a provision under federal law (the Fair Labor Standards Act) that allows employers to pay tipped employees a lower cash wage, using the employees' tips to make up the difference to reach minimum wage. The employer receives "credit" against their minimum wage obligation based on the tips employees receive.

California does not allow tip credits. This is one of the most important distinctions between California and federal wage law, providing California tipped workers with significantly stronger protections than employees in most other states.

California's Prohibition on Tip Credits

The Legal Basis

California Labor Code Section 351 establishes that:

"No employer or agent shall collect, take, or receive any gratuity or a part thereof that is paid, given to, or left for an employee by a patron."

Combined with California's minimum wage laws, this means:

California Rule	Effect
Tips cannot offset wages	Employers must pay full minimum wage before tips
Tips are employee property	Employers have no claim to tip income
No sub-minimum wage	Every hour must be paid at full minimum wage
Tips are additional compensation	Tips are on top of, not instead of, wages

Why California Prohibits Tip Credits

California's prohibition serves several policy goals:

Worker Protection: Ensures stable, predictable base income
Simplicity: Eliminates complex calculations and disputes
Income Security: Tips supplement rather than replace wages
Employer Accountability: Employers bear full labor costs

Federal Tip Credit Rules (Not Applicable in California)

Understanding federal rules helps explain why California's protections are stronger.

Federal FLSA Tip Credit

Under federal law (which does NOT apply in California):

Federal Rule	Detail
Cash wage	Employer can pay as low as $2.13/hour
Tip credit	Up to $5.12/hour (difference to federal minimum)
Minimum guarantee	Tips must bring total to at least $7.25/hour
Employer responsibility	Must make up shortfall if tips are insufficient

States That Allow Tip Credits

State Type	Examples
Full federal tip credit	Texas, Indiana, North Carolina, many others
Partial tip credit	Florida ($8.98 tip credit wage), Arizona, others
No tip credit	California, Oregon, Washington, Minnesota, others

Practical Impact for California Employers

Wage Requirements for Tipped Employees

California employers must:

Requirement	2024 Rate
Pay at least state minimum wage	$16.00/hour
Pay local minimum wage if higher	Varies by city
Pay industry-specific minimums	Fast food: $20.00, Healthcare: up to $25.00
Count all hours for overtime	Tips don't reduce overtime obligation

Example: California vs. Federal

Consider a server working 8 hours who receives $120 in tips:

Calculation	Federal (with tip credit)	California (no tip credit)
Cash wage from employer	$2.13 × 8 = $17.04	$16.00 × 8 = $128.00
Tips received	$120.00	$120.00
Total compensation	$137.04	$248.00
Hourly effective wage	$17.13/hour	$31.00/hour

The California server earns significantly more because tips are additive, not substitutive.

Common Employer Mistakes in California

Treating Tips as Part of Minimum Wage

Mistake	Why It's Wrong
"Your tips bring you above minimum wage"	Minimum wage must be paid before tips
Reducing base pay for high-tip positions	Wage rate cannot account for expected tips
Calculating overtime with tips included	Tips are separate from regular rate calculation

Improperly Using Tips

Violation	Penalty
Counting tips toward minimum wage	All tips wrongfully credited + equal damages
Deducting tips for cash shortages	Return of tips + penalties
Requiring tip sharing with managers	Full amount of manager's share + damages

Misunderstanding Who Is Tipped

Not all employees who receive tips qualify as "tipped employees" under federal law (though this distinction matters less in California):

Federal Definition	California Approach
Regularly receives more than $30/month in tips	No threshold - all tips belong to employee
Only these employees subject to tip credit	No tip credit permitted for any employee

Overtime and Tips in California

Calculating Overtime for Tipped Employees

In California, tips do not count toward the regular rate of pay for overtime calculations:

Pay Component	Included in Regular Rate?
Base hourly wage	Yes
Non-discretionary bonuses	Yes
Commissions	Yes
Tips	No

Example: Overtime Calculation

A server earning $16/hour works 50 hours and receives $400 in tips:

Calculation	Amount
Regular hours (40 × $16)	$640.00
Overtime hours (10 × $24)	$240.00
Tips (not included in OT calculation)	$400.00
Total compensation	$1,280.00

Comparison to States With Tip Credits

In states with tip credits, the overtime calculation can be more complex, as employers may need to ensure the blended rate meets minimum wage requirements.

Service Charges vs. Tips

Understanding the distinction is critical:

Service Charge	Tip
Mandatory amount set by employer	Voluntary amount set by customer
Property of employer initially	Always property of employee
May or may not go to employees	Must go to employees
Often 18-20% for large parties	Any amount customer chooses
Employer can allocate as desired	Must go to tip pool participants

Disclosure Requirements

When employers add service charges:

Clear Labeling: Must distinguish from gratuity
Disclosure: Tell customers if charge doesn't go to staff
Menu Notice: Recommended to explain on menu
Receipt Clarity: Show service charge separate from tip line

If Service Charge Is Called "Gratuity"

When a mandatory charge is labeled as a gratuity:

Customers reasonably expect it goes to employees
Best practice is to distribute to service staff
Failure to distribute may constitute wage theft
Can expose employer to legal claims

Multi-State Employer Considerations

Compliance Across Jurisdictions

Employers operating in multiple states must:

Consideration	Approach
Know each state's rules	Some allow tip credits, California doesn't
Separate payroll systems	Apply correct rules per location
Train local managers	Ensure state-specific compliance
Maintain separate policies	Written policies for each jurisdiction

California Work by Out-of-State Employees

When employees from tip-credit states work in California:

California law applies to hours worked in California
Full minimum wage required for California hours
Tips earned in California cannot offset wages

Record-Keeping Requirements

Employer Documentation

California employers must maintain:

Record	Retention Period
Tip pool distributions	3 years minimum
Employee tip reports	3 years minimum
Time records	3 years minimum
Payroll records showing tips	3 years minimum
Tip pool policies	Duration of employment + 3 years

Wage Statement Requirements

California wage statements must include:

Gross wages earned (excluding tips)
All deductions
Net wages paid
Dates of pay period
Hours worked (for non-exempt employees)

Tips reported should be documented but may be shown separately.

Employee Rights Regarding Tips

What Employees Should Know

Right	Protection
Full minimum wage	Required regardless of tips
All tips belong to you	Employer cannot take any portion
Tip pooling limits	Only with eligible coworkers
No credit card fee deductions	Employer absorbs processing costs
Prompt payment	Tips due by next regular payday

Protecting Your Tips

If you believe your employer is violating tip laws:

Document all tips received
Keep copies of pay stubs
Note any tip deductions or shortages
File a wage claim with the Labor Commissioner
Consult an employment attorney

Retaliation Protection

Employees who report tip violations are protected under:

Labor Code Section 98.6
Whistleblower protection laws
Anti-retaliation provisions

Industry Applications

Restaurant and Bar Industry

Practice	California Compliance
Minimum wage	Full state/local minimum required
Tip pools	Only among eligible employees
Tip outs to kitchen	Recently permitted in some circumstances
Manager tip sharing	Prohibited
Service charges	Employer property; disclosure required

Hotel Industry

Practice	California Compliance
Housekeeping tips	Belong to individual housekeeper
Concierge tips	Property of concierge
Valet tips	Go to valet staff
Bellhop tips	Property of bellhop
Automatic resort fees	Not tips; employer property

Salon and Spa Industry

Practice	California Compliance
Individual tips	Belong to service provider
Credit card tips	Must be paid in full by next payday
Mandatory gratuities	Not tips; employer sets distribution
Booth renters	May keep all tips (independent contractors)