[Excerpt] The Fair Labor Standards Act (FLSA), enacted in 1938 (P.L. 75-718), is the federal legislation that establishes the general minimum wage that must be paid to all covered workers. At present, the vast majority of workers are covered by the minimum wage provisions of the FLSA. These provisions have been amended numerous times since 1938, typically for the purpose of expanding coverage or raising the wage rate. The most recent change was enacted in 2007 (P.L. 110-28) to increase the minimum wage to $7.25 per hour by July 2009

Bradley, David H

English

DigitalCommons@ILR

Cornell University ILR School 
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Federal Publications Key Workplace Documents 
6-27-2018 
Tip Credit and Tip Pooling Provisions of the Fair Labor Standards 
Act 
David H. Bradley 
Congressional Research Service 
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Tip Credit and Tip Pooling Provisions of the Fair Labor Standards Act 
Abstract 
[Excerpt] The Fair Labor Standards Act (FLSA), enacted in 1938 (P.L. 75-718), is the federal legislation that 
establishes the general minimum wage that must be paid to all covered workers. At present, the vast 
majority of workers are covered by the minimum wage provisions of the FLSA. These provisions have 
been amended numerous times since 1938, typically for the purpose of expanding coverage or raising the 
wage rate. The most recent change was enacted in 2007 (P.L. 110-28) to increase the minimum wage to 
$7.25 per hour by July 2009. 
Keywords 
Fair Labor Standards Act, FLSA, contract work, tip credit, tip pooling 
Comments 
Suggested Citation 
Bradley, D. H. (2018). Tip credit and tip pooling provisions of the Fair Labor Standards Act (CRS In Focus 
IFI0917). Washington, D.C.: Congressional Research Service. 
This article is available at DigitalCommons@ILR: https://digitalcommons.ilr.cornell.edu/key_workplace/2100 
 www.crs.gov  |  7-5700 
June 27, 2018
Tip Credit and Tip Pooling Provisions of the Fair Labor 
Standards Act
Introduction 
The Fair Labor Standards Act (FLSA), enacted in 1938 
(P.L. 75-718), is the federal legislation that establishes the 
general minimum wage that must be paid to all covered 
workers. At present, the vast majority of workers are 
covered by the minimum wage provisions of the FLSA. 
These provisions have been amended numerous times since 
1938, typically for the purpose of expanding coverage or 
raising the wage rate. The most recent change was enacted 
in 2007 (P.L. 110-28) to increase the minimum wage to 
$7.25 per hour by July 2009. 
Tipped Employees under the FLSA 
Employees are covered by the minimum wage and overtime 
provisions of the FLSA unless they are specifically 
exempted. The act allows employers of certain groups of 
employees to pay less than the statutory minimum wage. In 
the case of employees who regularly earn tips as part of 
their work, two provisions of the FLSA—tip credit and tip 
pooling—permit a different pay structure than applies to 
non-tipped workers. 
FLSA Tip Credit Provisions 
As part of the 1966 amendments to the FLSA that expanded 
minimum wage coverage to include restaurant and hotel 
employees (P.L. 89-601), Congress added a tip credit 
provision to the minimum wage provisions. Under Section 
203(m) of the FLSA, a “tipped employee”—a worker who 
customarily and regularly receives more than $30 a month 
in tips—may have his or her cash wage from an employer 
reduced, as long as the combination of wages from the 
employer and tips equals the federal minimum wage. That 
is, the “credit” is the amount from employee tips that an 
employer may count against its liability for the required 
payment of the full federal minimum wage. 
Tip Credit Components 
The FLSA tip credit provisions are comprised of two 
components—“the employer cash wage” and the “tip 
credit.” 
 The employer cash wage is the minimum amount that an 
employer is required to pay a tipped worker. Currently, 
the FLSA sets this at $2.13 per hour, which is 29% of 
the current federal minimum wage of $7.25 per hour. An 
employer of a tipped employee, just like an employer of 
any FLSA-covered employee, is ultimately responsible 
for payment of the full minimum wage to that employee. 
 The tip credit is the amount of earnings from tips that an 
employer may count against its liability for the full 
minimum wage. Under current law, and at the current 
federal minimum wage rate of $7.25 per hour, the 
maximum tip credit is $5.12 per hour, which means 
employers may take a credit of up to 71% of their 
required obligation to pay a minimum wage. A higher 
tip credit means that an employer may count more in 
tips toward the employer liability for the minimum 
wage. A lower tip credit means that an employer must 
provide a greater share of an employee’s compensation 
in direct cash wages. No tip credit means that an 
employer must pay direct cash wages equal to the 
prevailing minimum wage and the tipped worker does 
not have to credit any tip income toward the total 
minimum wage. 
Thus, the existence of a tip credit means that the two 
components of the minimum wage for tipped workers—the 
employer cash wage and tips—must equal the required 
minimum wage. The tip credit does not create a 
subminimum wage from the standpoint of a tipped worker 
but it changes the composition of earnings from solely 
employer-paid to a combination of employer wages and 
tips. The exact mix of those two earnings components 
depends on the prevailing minimum wage, the tip credit 
allowance, and the amount received in tips. 
The size of the tip credit has changed over time. Prior to 
1996, the amounts for the minimum employer cash wage 
and tip credit were set as a percentage of the federal 
minimum wage, ranging from 40% to 55%. That is, during 
the 30-year period from 1966 to 1996, employers of tipped 
employees could take a credit from tip earnings of between 
40% and 55% of the minimum wage against their liability 
to provide the minimum wage to their employees. The 1996 
FLSA amendments (P.L. 104-188) set the employer’s 
statutory minimum cash wage at $2.13 per hour (rather than 
a percentage of the minimum wage) and the size of the tip 
credit became dependent on the value of the minimum 
wage (i.e., the tip credit after 1996 equals the minimum 
wage minus $2.13). 
FLSA Tip Pooling Provisions 
Prior to 1974, the pooling or sharing of tips was not 
addressed in the FLSA and was typically a matter worked 
out between employees and an employer. Congress 
amended the tip credit provisions of the FLSA in 1974 (P.L. 
93-259) to clarify that the tip credit may only be used to 
satisfy the minimum wage requirement if the tipped 
employee retains all tips received, except that this provision 
did not “prohibit the pooling of tips among employees who 
customarily and regularly receive tips.” Stated differently, 
the 1974 amendments provided that tipped employees must 
be allowed to keep 100% of their tips, but could be required 
to participate in mandatory (i.e., employer-imposed) tip 
pools among tipped workers only. A tip pool was 
Tip Credit and Tip Pooling Provisions of the Fair Labor Standards Act 
www.crs.gov  |  7-5700 
considered valid only if it was limited to tipped employees. 
Voluntary (i.e., employee-determined) tip pools were 
permissible in any instance and could include both tipped 
and non-tipped employees. The FLSA does not address 
limits on tip pool contributions from employees, and the 
Department of Labor’s (DOL’s) past attempts to set 
maximum tip pool contribution percentages have been 
prohibited due to a lack of statutory authority. 
DOL’s 2011 Rule on Tip Pooling 
In 2011, DOL issued new regulations that addressed tip 
pooling, codifying three main provisions: (1) tips belong to 
employees receiving the tips; (2) the only permissible 
employer uses of employee tips are for the tip credit 
allowed by the FLSA or a valid tip pool (i.e., tipped 
employees only); and (3) even if an employer pays the full 
federal minimum cash wage and does not utilize the tip 
credit, the employer could not require tip pools that 
included non-tipped workers. In other words, the provisions 
in the 2011 rule specify that in no instance may employers 
mandate a tip pool that involves non-tipped employees. 
DOL’s 2017 Proposed Rule on Tip Pooling 
In 2017, DOL issued a Notice of Promised Rulemaking 
(NPRM) indicating its intent to change portions of the 2011 
rule. Specifically, the 2017 NPRM would maintain the 
permissible uses of employee tips—a tip credit against the 
minimum wage obligation and valid tip pools. However, the 
2017 NPRM would permit the reallocation of pooled tips to 
both tipped and non-tipped workers in cases in which the 
employer paid at least the full federal minimum cash wage 
rather than using the tip credit provisions. The NPRM did 
not specify which non-tipped employees would be eligible 
for participation in tip pools. A final rule based on the 
NPRM has not yet been issued. 
The Consolidated Appropriations Act, 2018 
The Consolidated Appropriations Act, 2018 (P.L. 115-141, 
Division S, Title XII, Section 1201) amended the FLSA to 
further clarify the use of employee tips. First, the act 
provided, in part, that employers, managers, and 
supervisors are prohibited from keeping any portion of 
employee tips, regardless of whether or not the employer 
uses the tip credit. Second, the act indicated that certain 
provisions of the 2011 rule will have “no further force or 
effect” until “future action” on tip pooling by DOL. 
Specifically, the act suspends the provisions from the 2011 
rule that prohibited tip pooling in instances when employers 
do not use the tip credit against their minimum wage 
obligation. In guidance issued following enactment of P.L. 
115-141 (Field Assistance Bulletin No. 2018-3), DOL 
confirmed that employers paying the full federal minimum 
wage (i.e., not using the tip credit) are not prohibited from 
allowing non-tipped employees to participate in tip pools, 
but in no instance may managers or supervisors participate 
in such pools. Table 1 provides a summary of which 
employees are permitted to participate in tip pools based on 
their employer’s use of the tip credit. 
Table 1. Participation in Tip Pooling under the FLSA 
 Employer’s Use of Tip Credit 
Employee Tip Credit No Tip Credit 
Tipped Yes Yes 
Non-Tipped No Yes 
Source: CRS analysis of P.L. 115-141, and Bryan L. Jarrett, Field 
Assistance Bulletin No. 2018-3, U.S. Department of Labor, Wage and 
Hour Division, Washington, DC, April 6, 2018. 
Interaction with State Laws 
Because several states have minimum wage rates that are 
different (mostly higher) than the federal minimum wage 
and different tip credit and tip pooling provisions, the 
impact of changing federal tip credit and pooling provisions 
would vary across states. 
Tip Credit 
In general, where there are conflicting minimum wage 
provisions, the higher standard (e.g., higher wage rate) 
prevails. That is, where the minimum wage or tip credit 
provisions are more beneficial to employees, they prevail. 
As of 2018 
 seven states—Alaska, California, Minnesota, Montana, 
Nevada, Oregon, and Washington—do not allow a tip 
credit; employers must pay the full statutory state or 
federal minimum wage (whichever is higher); 
 26 states and the District of Columbia require a 
minimum employer cash wage that is greater than the 
federal rate of $2.13 per hour; and 
 17 states require a minimum employer cash wage of 
$2.13 per hour, required either by state law or by 
reference to federal law. 
Tip Pooling 
There is wide variation across states in tip pooling 
provisions, with different state requirements not being 
easily classifiable. Several states do not address employer 
access to tips outside of the tip credit context, similar to the 
FLSA prior to P.L. 115-141. Some states, such as 
Kentucky, prohibit mandatory tip pools but allow voluntary 
agreements among employees. Other states, such as North 
Carolina and Delaware, allow mandatory tip pools but limit 
the amount of tips that may be diverted into a tip pool. 
Following the changes to the FLSA in the 2018 
appropriations act, in states that do not permit a tip credit, 
employers may require tip pools that include tipped and 
non-tipped employees, unless state law otherwise prohibits 
such actions. 
 
David H. Bradley, dbradley@crs.loc.gov, 7-7352 
IF10917 


Tip Credit and Tip Pooling Provisions of the Fair Labor Standards Act

[Excerpt] The Fair Labor Standards Act (FLSA), enacted in 1938 (P.L. 75-718), is the federal legislation that establishes the general minimum wage that must be paid to all covered workers. At present, the vast majority of workers are covered by the minimum wage provisions of the FLSA. These provisions have been amended numerous times since 1938, typically for the purpose of expanding coverage or raising the wage rate. The most recent change was enacted in 2007 (P.L. 110-28) to increase the minimum wage to $7.25 per hour by July 2009.CRS_IF_Tip_credit_and_tip_pooling.pdf: 27 downloads, before Oct. 1, 2020

Bradley, David H.

eCommons@Cornell

https://digitalcommons.ilr.cornell.edu/cgi/viewcontent.cgi?article=3105&amp;context=key_workplace

Tip Credit and Tip Pooling Provisions of the Fair Labor Standards Act

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