April 09, 2026 | Posted By: Emma Doull
Summer hiring season is almost here, and for hotels, restaurants, bars, and other hospitality businesses, that means one thing beyond staffing headaches: making sure your wage and hour practices are airtight before the first seasonal employee clocks in. Tip credit rules, in particular, have been shifting at the federal, state, and local levels, and getting them wrong can expose your business to wage theft claims, back pay liability, and class action lawsuits.
Here is what you need to know heading into the 2026 summer season.
The Tip Credit Basics
Federal law allows employers to pay tipped employees a cash wage as low as $2.13 per hour, as long as the employee’s tips bring their total hourly compensation up to at least the federal minimum wage of $7.25. This is known as the “tip credit,” and it has been a cornerstone of hospitality wage structures for decades.
To take the tip credit, the employee must be someone who customarily and regularly receives tips, such as servers, bartenders, and similar front-of-house workers. Employers must also provide proper notice to employees explaining how the credit works and what wage they are receiving.
One firm rule applies regardless of where you operate: owners, managers, and supervisors cannot participate in a tip pool under any circumstances. Violating that prohibition eliminates the tip credit entirely and can result in significant back pay liability.
Tip Pooling: Two Types, Two Different Rules
When it comes to tip pools, the Department of Labor recognizes two distinct arrangements, and the rules differ meaningfully between them.
The first is a traditional tip pool, limited to employees who customarily and regularly receive tips. Servers, bussers, bartenders, bellhops, and counter staff who serve customers are all fair game. Employers who use this structure may continue to take the tip credit.
The second is a nontraditional tip pool, which includes both tipped and non-tipped employees, such as cooks and dishwashers. Employers who opt for this arrangement must pay every participant the full federal minimum wage. The tip credit is not available when non-tipped workers are included in the pool.
Choosing the wrong structure, or mixing the two without realizing it, is one of the most common compliance errors in the hospitality industry.
The Side Work Rules Have Changed — But Not Everywhere
For years, the DOL’s “80/20 rule” governed how much non-tipped side work a tipped employee could perform before the employer lost the tip credit for that time. Under that standard, if an employee spent more than 20 percent of their hours in a workweek on non-tip-producing tasks, the employer had to pay the full minimum wage for that excess time. The Biden administration added a further wrinkle in 2021, restricting tip credits for “directly supporting work” performed for more than 30 consecutive minutes.
That additional layer did not last. In 2024, the Fifth Circuit Court of Appeals vacated the 80/20/30 rule after a legal challenge brought by the Restaurant Law Center, and the DOL subsequently removed it from its regulations. In jurisdictions covered by the Fifth Circuit, which includes Texas, Louisiana, and Mississippi, there are currently no time limits on side work, provided the work is part of the tipped occupation.
Here is the catch: the Fifth Circuit’s decision does not bind courts in other parts of the country. Outside that circuit, plaintiffs’ attorneys are still filing claims, arguing that the original 80/20 rule applies, relying on pre-existing case law from when the guidance was in effect. And several states have enacted their own versions of the 80/20 rule that remain fully operative regardless of what the federal courts say.
The practical takeaway for employers is this: where you operate determines which rules apply. Do not assume that a favorable federal court ruling protects you in every state where you do business.
State and Local Law Is Where the Real Complexity Lives
The federal tip credit floor of $2.13 per hour has not changed since 1991. But below that federal ceiling, states and cities have been moving aggressively. Many states have higher minimum wages that require a correspondingly higher cash wage for tipped employees. Others have eliminated the tip credit altogether, requiring employers to pay tipped workers the full state minimum wage regardless of gratuities received.
Two pending developments deserve particular attention heading into this summer:
In New York City, lawmakers are considering legislation that would phase out the tip credit for food service workers entirely and raise the applicable minimum wage to $30 per hour. The proposal is still pending, but employers with New York City operations should be monitoring it closely.
In Chicago, the city council and mayor are at an impasse over whether to freeze the minimum wage for tipped workers at $12.62 or allow the planned phase-out to continue. A council vote to override the mayor’s veto could come at any time. Employers operating in Chicago need to watch this closely, as the outcome directly affects their labor costs.
Beyond these two cities, the broader lesson is that tip credit compliance is inherently local. The rules governing a restaurant in Miami are not the same as those governing the same restaurant concept in Seattle or Denver. If you operate across multiple jurisdictions, you need jurisdiction-by-jurisdiction analysis, not a one-size-fits-all policy.
Four Things Employers Should Do Before Summer Hiring Begins
Give proper tip credit notices. Federal law requires employers who take the tip credit to notify employees of the applicable cash wage, the amount of the tip credit being claimed, and that tips must equal or exceed the minimum wage. While oral notice is technically permitted, a written acknowledgment signed by the employee is a far stronger compliance practice and a meaningful defense if a claim is later filed.
Audit your tip pool structure. Review who is included in your tip pool and confirm that the arrangement matches one of the two permissible structures. Make sure no managers or supervisors are receiving pooled tips under any circumstances. If your business has grown or reorganized since you last reviewed your tip pool, roles may have shifted, affecting eligibility.
Know your jurisdiction’s rules. If you operate in multiple states or cities, do not rely solely on federal law. Check the applicable minimum wage, whether your state permits the tip credit, whether an 80/20 rule applies under state law, and whether any local ordinances impose additional requirements. When in doubt, consult with an employment attorney who handles wage and hour matters in your specific markets.
Train your managers. Wage and hour violations in the hospitality industry often stem from managers who do not understand the rules. Regular training on tip credit requirements, prohibited conduct, and how to handle common situations, like an employee whose tips fall short of the minimum wage in a given workweek, goes a long way toward preventing costly mistakes.
The Stakes Are Real
Wage and hour claims in the hospitality industry are among the most frequently filed employment lawsuits in the country. They are often brought as collective or class actions, meaning a single compliance failure can affect dozens or hundreds of employees and generate liability that far exceeds the original wage shortfall. Attorneys’ fees provisions in federal and state wage laws make these cases attractive to plaintiffs’ lawyers.
Getting your tip credit practices right before the summer rush begins is far less expensive than defending a wage claim after the fact. Hoyer Law Group’s employment law attorneys advise employers on wage and hour compliance and help businesses build practices that reduce legal exposure before problems arise. Our HR consulting services are also available to help hospitality employers put the right policies and training programs in place.
Contact Hoyer Law Group
If you have questions about tip credit compliance, wage and hour requirements, or your summer hiring practices, we are here to help. Contact Hoyer Law Group for a confidential evaluation at www.hoyerlawgroup.com/contact/ or call us at (844) 531-0082.
This blog is for general informational purposes only and does not constitute legal advice. For advice specific to your situation, please consult a qualified attorney.