Can an Employer Adjust Your Claimed Tips?

Federal and state laws govern whether an employer can adjust an employee’s tips. These regulations protect employee earnings while giving employers limited circumstances to account for tips in wage calculations. This guide provides an overview of how tips are defined, when adjustments are lawful, and what practices are forbidden.

Defining Tips vs. Employer-Controlled Charges

A tip is a voluntary payment made by a customer who has the unrestricted right to determine the amount, whether given in cash or on a credit card. The payment is defined as a tip belonging to the employee because it is not compelled.

In contrast, a mandatory service charge is not a tip. These are automatic charges, such as an “18% gratuity added for groups of six or more.” Because the customer must pay this amount, it is considered employer revenue. The employer can distribute these funds to staff, but they are treated as wages, not tips, and are subject to payroll tax withholdings.

When a customer leaves a credit card tip, the employer can deduct the proportional cost of the processing fee from the employee’s tip. For example, if a credit card company charges a 3% fee, the employer can deduct $3 from a $100 tip before giving the remaining $97 to the employee. The employer cannot deduct more than the actual percentage charged by the credit card processor.

Lawful Employer Adjustments and Credits

Federal law allows employers to make adjustments through the “tip credit” system. The Fair Labor Standards Act (FLSA) permits an employer to pay a tipped employee a direct cash wage lower than the federal minimum wage, as long as the employee’s tips make up the difference. The federal direct cash wage is $2.13 per hour, but this only applies if it, combined with tips, meets the full federal minimum wage of $7.25 per hour. If an employee’s tips and direct wage do not meet the minimum wage for a pay period, the employer must pay the difference.

This tip credit is an adjustment to the employer’s minimum wage obligation, not a deduction from the employee’s earned tips. Many states and cities have higher minimum cash wage requirements for tipped employees, and employers must pay the higher rate when applicable.

Another adjustment occurs for tax reporting under Internal Revenue Service (IRS) rules, affecting large food and beverage establishments. If total reported tips are less than 8% of the business’s gross receipts, the employer may have to allocate the shortfall among employees. This allocated amount is reported on the employee’s Form W-2. This is a tax-reporting requirement and does not give the employer the right to take cash from an employee’s tips.

Prohibited Employer Practices with Tips

Federal law prohibits employers from engaging in several practices. The most direct violation is tip theft, where an employer, manager, or supervisor keeps any portion of an employee’s tips. The FLSA was amended to make clear that tips are the property of the employee, and under no circumstances can an employer retain them.

The law also limits tip pooling arrangements. Employers can require tipped employees to contribute to a valid tip pool shared with other eligible workers, like bussers and hosts, but these pools cannot include management. Including ineligible individuals in the pool invalidates the arrangement and can lead to significant employer liability.

Employers are also prohibited from using an employee’s tips to cover business costs. An employer cannot deduct expenses like customer walkouts, cash register shortages, or the cost of broken equipment from an employee’s tips.

What to Do if Your Employer Illegally Adjusts Tips

If you suspect your employer is unlawfully adjusting your tips, the first step is to maintain detailed private records. Keep a daily log of the dates and hours you worked, your gross sales if applicable, and the total tips you received in both cash and on credit cards. This documentation is important evidence if a formal complaint becomes necessary.

With your records, you can file a complaint with the U.S. Department of Labor’s Wage and Hour Division (WHD), the federal agency that enforces the FLSA. You can file a complaint online, by phone, or in person at a local office. You will need to provide your contact information, the employer’s name and address, and details about the alleged violation.

Many states also have their own labor departments that investigate wage theft complaints. These state agencies may enforce laws that provide greater protections or have different procedural requirements than federal law. Contacting your state’s labor agency is another path to resolve the issue and recover withheld tips.