Restaurant Tip Credit: FLSA 80/20 Rule & State-by-State Guide
The restaurant tip credit lets you pay as little as $2.13/hour—but the 80/20 rule and state laws create landmines. Here's what you need to know.
Restaurant Tip Credit: FLSA 80/20 Rule & State-by-State Guide
The restaurant tip credit is a provision of the Fair Labor Standards Act (FLSA) that allows employers in qualifying states to pay tipped employees a cash wage as low as $2.13/hour—as long as tips bring the employee's total compensation to at least the federal minimum wage of $7.25/hour.
It sounds simple. In practice, the rules around the tip credit—especially the 80/20 rule—generate more restaurant labor violations than almost any other employment law provision.
How the Tip Credit Works
The federal tip credit allows you to count up to $5.12/hour in tips toward your minimum wage obligation:
- Federal minimum wage: $7.25/hour
- Maximum tip credit: $5.12/hour
- Minimum cash wage with tip credit: $2.13/hour
If a server works 5 hours, earns $12 in cash wages, and receives $45 in tips, their effective rate is $11.40/hour—above minimum wage. The tip credit works.
But if that same server has a slow shift and earns only $3 in tips, their total compensation for 5 hours is $15.65, or $3.13/hour—below minimum wage. You must make up the shortfall. This is your legal obligation, and it must be paid in the same workweek.
Most important rule: Track tipped employees' actual hourly compensation every week. If tips don't cover the gap to minimum wage, you owe the difference.
The 80/20 Rule: The Most Common Trap
Under the FLSA, you can only apply the tip credit for hours during which an employee is doing "tipped work"—work directly related to generating tips.
The rule: if a tipped employee spends more than 20% of their time in a workweek on non-tipped duties (side work, cleaning, rolling silverware, stocking, food prep), you must pay them the full minimum wage for that non-tipped time.
Example: A server works 8 hours. Two hours are spent on opening side work (rolling silverware, filling salt shakers, setting tables) before any guests arrive. That's 25% of their time on non-tipped work. You must pay full minimum wage for those 2 hours.
As of 2025, the core 80/20 principle remains, with enforcement focused on extended continuous periods of non-tipped work rather than isolated tasks within a shift.
State-by-State Tip Credit Rules
Many states do not allow the federal tip credit at all. If you operate in these states, you must pay all tipped employees the full state minimum wage regardless of tips:
| State | Tip Credit Allowed? | Minimum Cash Wage |
|---|---|---|
| California | No | State minimum wage ($16+/hr) |
| Washington | No | State minimum wage |
| Oregon | No | State minimum wage |
| Minnesota | No | State minimum wage |
| Alaska | No | State minimum wage |
| New York | Partial | $10.00 (NYC; varies by region) |
| Nevada | Partial | Complex formula |
| Florida | Yes | $3.02/hour minimum (2025) |
| Texas | Yes | $2.13/hour minimum |
| Illinois | Yes | Varies |
Always verify your state's specific rules. The federal $2.13/hour floor hasn't increased in decades, but many states have raised minimum cash wages substantially.
Tip Pooling Rules Under the FLSA
Since 2018, the FLSA allows tip pooling with back-of-house employees (cooks, dishwashers)—but only if the employer does not take a tip credit. If you take a tip credit, tips must stay with tipped employees.
This is the "all or nothing" rule:
- Take the tip credit → tips stay with tipped employees
- Don't take the tip credit → tips can be pooled with BOH
Some states are more restrictive. California prohibits tip pooling with management and supervisors regardless of the tip credit situation.
Recordkeeping Requirements
To defend a tip credit claim, you must maintain records showing:
- Employee's cash wage paid
- Hours worked in tipped capacity
- Total tips received each week
- Tip shortfall makeup payments (if any)
Failure to maintain these records shifts the burden of proof to you in any wage dispute.
Frequently Asked Questions
What happens if my server's tips don't cover the minimum wage gap?
You must pay the shortfall in the same workweek. You cannot "average" across multiple weeks—it's calculated per workweek.
Can I take the tip credit if an employee is doing both tipped and non-tipped work?
Yes, but only for hours spent on tipped work. If more than 20% of their time is non-tipped duties, you must pay full minimum wage for that time.
Does the tip credit apply to bartenders?
Yes, bartenders are typically classified as tipped employees and the tip credit applies, subject to the same 80/20 rule.
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