What is a tip credit?

A tip credit allows an employer to pay an employee who receives tips less per hour, with the tips being used to make up the difference between the minimum wage and the employee’s wage. The federal minimum wage is $7.25, but the federal minimum wage for tipped employees is $2.13, meaning a $5.12 tip credit can make up the difference. If an employee doesn’t reach $7.25 after tips, the employer is required to pay the difference.

Federal law allows employers to use a tip credit, as do most states. The New York Department of Labor, for example, has a fact sheet that shows state rules regarding tip credits.

Part of the debate regarding tip credits is about whether they make it easier for employers to take advantage of employees. The mayor of Minneapolis, MN argues that tip credits would do just that, making tipped employees more vulnerable and overworked. Part of her argument is that everyone should be paid a living minimum wage without relying on tips.

On the other side, many argue that a tip credit system is fair for employees and employers because it allow employers to keep overhead low while guaranteeing minimum wage for employees.

No matter where you stand on the debate, it’s important to know what a tip credit is, and how it can affect you.

A tip credit allows an employer to pay an employee in a tipped role less, with the tip credit making up the difference between the employee’s wage and minimum wage. The federal minimum wage is $7.25, but the federal minimum wage for tipped employees is $2.13, meaning a $5.12 tip credit can make up the difference. If an employee doesn’t reach $7.25 after tips, the employer is required to pay the rest.

Federal law allows employers to use a tip credit, as do most states. The New York Department of Labor, for example, has a fact sheet that shows state rules regarding tip credits.

Part of the debate regarding tip credits is about whether the system makes it easier for employers to take advantage of employees. This is the argument the Mayor of Minneapolis, MN has made in the debate about minimum wage in the city. Part of her argument is that everyone should be paid a living minimum wage without relying on tips.

On the other side, many argue a tip credit is a fair system for employees and employers because it allow employers to keep overhead low while guaranteeing minimum wage for employees.

No matter where you stand on the debate, it’s important to know what a tip credit is, and how it can affect you.