Federal minimum wage laws are different for tipped employees, though this doesn’t mean that employers can pay tipped employees less than non-tipped employees. The minimum wage for tipped employees is set with the assumption that the employees earn above a set amount in tips each month. If that amount is not reached, it is up to the employer to make up the difference in wages.
On top of that, the minimum rate, the expectation of tips, and the difference between the tipped and non-tipped minimum wage rate all vary depending on your state. Whether you are a tipped employee or someone who employs tipped workers, it is important to understand how federal minimum wage rates work and your state minimum wage laws.
Federal laws for tipped employees
Minimum wage rates are set by the federal government at $7.25 per hour. That means no one anywhere in the country can be paid less than that amount for their work. However, there is a stipulation for tipped workers. A tipped worker is defined by the federal government as anyone who receives $30 or more per month in tips on a regular basis. Due to the consistency of these tips, employers are only obliged to pay a minimum wage of $2.13 per hour for tipped employees.
However, this lower figure is set with the presumption that the gap in earnings is made up by tips. The total amount a worker earns per hour must equal the federal minimum wage of $7.25. If the average hourly pay of a tipped worker (wage plus tips) is below the amount of the federal minimum wage, the employer must raise employee wages to account for the difference.
This difference between actual wages and total wages is known as a tip credit. The maximum federal tip credit is currently set at $5.12 per hour. Add this to the minimum tipped wage ($2.13) and it equals federal minimum wage, $7.25 per hour. Bear in mind that this is not a cap on earnings, tipped employees can exceed the tip credit if they earn more tips, resulting in a higher take-home wage.
State laws for tipped employees
Though there is a federally-mandated minimum wage rate, many states have set higher minimum wage rates. If you live in one of these states with both federal and state minimum wage rates, you are always guaranteed the higher rate of pay of the two. For example, workers in Arizona must be paid the state minimum wage of $12 per hour.
Just as many states have set their own minimum wage rates, some have their own minimum wage for tipped employees. In most cases the same logic applies: the minimum is set presuming that employees will earn above a certain amount in tips every month. In Connecticut, this amount is $10 per week for full-time employees, while in Vermont it’s as high as $120 per month.
In each state that a different law applies there is a different minimum cash wage and tip credit allowance. In all cases, the minimum cash wage and tip credit amount must add up to the highest minimum wage rate for that area (usually the state rate). In Arkansas, where the minimum wage rate is $10 per hour, the maximum tip credit is $7.37, making the minimum cash wage for tipped employees $2.63. Just like at the federal level, hourly earnings can exceed the minimum wage rate due to increased tips.
Federal contract workers are an exception to the rule. As of January 2020, tipped employees working on or in connection to covered contracts are guaranteed a cash wage of $7.55 per hour, but as federal contract workers, their total pay must be at least $10.80 per hour. That means that if federal contract workers do not receive the tip credit on average of $3.25 per hour, their employees must raise their minimum wage rate to make up the difference.
On the state level, there are some states that require tipped employees to be paid the full state minimum wage before tips. In these states all employees are guaranteed the same minimum wage whether they earn tips or not.
There are also various exceptions and specific definitions for tipped minimum wage and tip credit laws in various states.
Below is a comprehensive table detailing each state’s policies on minimum wage for tipped employees.