tip credit

A tip credit allows employers to pay tipped employees less than the standard minimum wage by counting a portion of their tips toward minimum wage requirements. If the employee’s tips plus the reduced wage meet or exceed the minimum wage, the employer is compliant. For example, if the minimum wage is $10 an hour and tips are expected to be $3 an hour, the employer can pay $7 an hour, with tips making up the remaining $3. This system helps businesses like restaurants manage labor costs while ensuring employees receive at least the legal minimum wage when tips are included.