April 29, 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, valets, 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, leading to aggressive filings.
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.
Tip Credit Rules for Hospitality Employers FAQ
Tip credit rules can be confusing for hospitality employers, and getting them wrong can lead to costly wage claims.
What is a tip credit?
A tip credit allows employers to pay tipped employees a lower base wage, with the expectation that tips will bring their total earnings up to at least the federal or state minimum wage. Under the Fair Labor Standards Act, the federal tipped minimum wage is $2.13 per hour. If tips do not cover the gap, the employer must make up the difference.
Who qualifies as a tipped employee?
Under federal law, a tipped employee is someone who regularly receives more than $30 per month in tips. This typically includes servers, bartenders, bussers, and other front-of-house roles in restaurants and hotels. Back-of-house workers like cooks and dishwashers generally do not qualify, which is a common source of compliance errors.
Can employers apply a tip credit without notifying employees?
No. Employers must inform employees before applying a tip credit. This includes:
- The amount of the cash wage being paid
- The amount of the tip credit being claimed
- That the credit cannot exceed the amount of tips actually received
- That the full minimum wage applies if tips fall short
What is the 80/20 rule in tipped wage law?
The 80/20 rule, sometimes called the dual jobs rule, limits how much non-tipped work a tipped employee can perform while still receiving the tip credit wage. If an employee spends more than 20 percent of their shift on duties that do not generate tips, such as rolling silverware or cleaning, the employer may owe full minimum wage for that time.
Do tip pools affect tip credit eligibility?
Yes. Tip pools are permitted under federal law, but they come with restrictions. Only employees who regularly receive tips can participate in a mandatory tip pool when an employer takes a tip credit. Including back-of-house workers in a tip pool under those circumstances can invalidate the tip credit entirely, creating significant back wage liability.
Does state law override federal tip credit rules?
In many cases, yes. Some states have higher minimum wages or do not allow tip credits at all. Hospitality employers operating in multiple states need to follow the law most favorable to the employee in each jurisdiction. Relying solely on federal rules without checking state law is a frequent compliance mistake.
What happens when an employer takes an improper tip credit?
The employer may owe back wages equal to the difference between what was paid and the full minimum wage for the affected pay periods. Under the Fair Labor Standards Act, employees may also be entitled to an equal amount in liquidated damages, plus attorney fees. The financial exposure can add up quickly across an entire workforce.
Are credit card processing fees allowed to reduce tip payouts?
Federal law allows employers to deduct a proportional share of credit card processing fees from tips paid by card. However, the deduction cannot bring the employee’s wage below the applicable minimum wage. Some states prohibit this deduction altogether, so employers should verify the rules in their state before applying this practice.
How do tip credits apply to overtime calculations?
Overtime for tipped employees must be calculated based on the full minimum wage, not the reduced tip credit wage. This is a widely misunderstood rule. An employer cannot simply multiply the reduced cash wage by 1.5 when calculating overtime pay. Doing so underpays employees and creates legal exposure.
What records should hospitality employers keep?
Accurate recordkeeping is a foundational part of tip credit compliance. Employers should maintain records of hours worked, tips reported by employees, wages paid, and any tip pool distributions. The Department of Labor can audit these records, and gaps in documentation often work against the employer in wage disputes.
Can salaried managers participate in tip pools?
No. Managers and supervisors are prohibited from participating in tip pools, regardless of whether the employer takes a tip credit. This rule applies even if a manager occasionally performs tipped work. Violations of this prohibition can expose employers to penalties beyond simple wage claims.
How often do tip credit rules change?
Fairly often at the state and local level. Minimum wage increases, new regulations on tip pooling, and changes to dual jobs guidance have all shifted in recent years. Hospitality employers should review their pay practices at least annually to stay current. Staying informed on tip credit rules for hospitality employers is part of running a legally sound operation.
Tip credit compliance is an area where small mistakes can become large liabilities. If you have questions about your current pay practices, Hoyer Law Group, PLLC can help you understand your obligations before problems arise.
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.