Workforce
Tip credit
What Tip credit means
A legal provision under US federal and state labor laws allowing employers to count a portion of a tipped employee's earned tips toward fulfilling minimum wage requirements. The hotel pays a direct cash wage below minimum wage, provided combined tips and cash wages equal or exceed minimum wage.
Formula
Tip Credit = Statutory Minimum Wage - Direct Cash Wage Paid
How it is used
Food and beverage directors and hotel accountants use the tip credit to control direct labor costs in outlets like restaurants, bars, and banquet operations. Management must rigorously track employee shift hours and declared tip totals per pay period. If an employee's tips plus direct cash wages fall short of the statutory minimum wage, the hotel must pay the difference, known as a tip makeup pay adjustment. Operations managers also monitor non-tipped duties, as spending over 20% of a shift on preparation work can invalidate the credit for those hours under the 80/20 rule.
Worked example
A hotel bar operates in a state with a $15.00 minimum wage and a maximum allowed tip credit of $5.00, making the required direct cash wage $10.00. A bartender works 40 hours ($400 direct cash wage) and declares $150 in tips, totaling $550 ($13.75/hour). Because this falls $1.25 per hour short of the $15.00 threshold, the hotel must pay an additional $50 makeup payment.
Common mistake
Failing to compensate employees for tip shortfalls on a per-pay-period basis exposes the property to severe labor law violations, back-pay liabilities, and legal penalties.