One of the aspects of American culture that first shocks tourists is tipping. In many countries, tipping is not a natural part of a cab ride, hotel assistance, or a meal at a restaurant. The tip is considered to be factored into the bill. Most people in the U.S. don’t completely understand how tipping factors into wages for workers, even though it’s an unspoken fundamental understanding of our culture. Part of that might be because wage laws become much more complicated when tipping is involved. The rules about what is a tip, how much an employer must pay an employee if tips are involved, and tipping pools can be tricky and even may vary from state to state. But there are some basic rules worth knowing if you have a job that involves or relies on tips.
First, it’s helpful to know that even though employers are bound by federal, state, and local laws, they also must follow whichever law is most generous to their workers. So if you are an employee and there is a conflict among the different laws that apply to your job, pick the one that gives the you the most money. For example, under federal law, the minimum wage is $7.25 but under New Jersey law, the minimum wage is $8.44. You have the right to the higher minimum wage if you work in New Jersey.
Another key principle to know as an employee is that the tips belong to you, the employee, and not the employer. This means that an employer cannot require an employee to give them their tips unless their job falls within two arrangements: 1) the employer takes a tip credit and 2) there is a tip pool. Assuming you’re in one of these situations and it is valid, an employer may ask for your tips.
Many states, including New Jersey, allow for an employer to pay an employee less than minimum wage, so long as the worker’s salary plus tips is equal to the required minimum wage. This is called a tip credit. The rules change for employees who do both tipped and non-tipped work. If the job requires an employee to spend 20% of his time doing non-tipped work, the employer must pay the full minimum wage and cannot take a tip credit for the time an employee is not partaking in tipped activities.
Tip pools are most common in restaurants and bars. All tipped employees contribute their tips to a pool – which is then divvied up among all of the workers. Those who support tip pools say that a pool compensates for when an unlucky waiter gets a difficult customer who does not tip well. On the other hand, it can make an employee less likely to provide above average service, since the tips are pooled anyway. There are limits on the use of tip pools, though. Workers can retain at least the full minimum wage, and employers can’t require them to pay more into the pool than is “customary and reasonable.” This means that if the employer also uses a tip credit structure on top of a tip pool, the it can only look at the amount of tips the employee takes home when calculating the employee reaching minimum wage.
If you find yourself in an employment that relies or includes tipping, or a restaurant not sure of what to do, make sure you know your rights and responsibilities. Employers may not always know what or do what they are required in these instances. Be sure to reach out to an attorney if you have any questions.
Angela Yu is a New Jersey and New York attorney with a multifaceted practice area focusing in corporate, real estate and general contract law. She uses her interest in real life application of the law to author articles and other scholarship on a broad range of cutting-edge legal and business topics. Ms. Yu is a published legal author and holds a J.D. and M.B.A. from Rutgers School of Law and Rutgers Business School. Neither she nor Mike Farhi provides legal advice on this website. This blog post and any blog posts do not constitute legal advice.