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According to the National Restaurant Association, there will be nearly 15 million people employed in the U.S. restaurant industry by the end of 2022. And if there’s anything the vast majority of restaurant workers have in common, it’s that nearly all are tipped employees.

As an employer, it’s your responsibility to offer a fair wage to your staff — not only because it’s the right thing to do, but because it’s employment law. At the same time, you need to pay attention to the rising cost of labor. To balance them both, you’ll need to understand the ins and outs of server minimum wage and the labor standards in place to hold you accountable.

In this guide, we’ll explain everything you need to know about paying tipped employees according to minimum wage law.

Minimum wage in the restaurant industry

In the United States, the Fair Labor Standards Act (FLSA) is the primary law that establishes minimum wage, overtime pay, recordkeeping and other labor standards affecting full- and part-time employees. Under the FLSA, the federal minimum wage is set at an hourly rate of $7.25.

However, minimum wage works a little bit differently in the restaurant industry. Generally, restaurant workers fall into two categories: employees who earn tips and those who don’t.

  • Tipped employees: According to the Department of Labor, a tipped employee is any worker that earns more than $30 in tips every month, though some states have slightly different standards. For instance, states like Arkansas and Hawaii set a lower requirement of $20 per month, whereas in South Dakota it’s set at $35.
  • Non-tipped employees: Restaurant workers who don’t earn tips — like cooks, cleaners or dishwashers — must be paid at least minimum wage.

A tipped employee earns what’s known as a tipped minimum wage. The tipped wage is made up of a basic cash wage (paid by the employer) and a tip credit (more on that later). Under federal employment law, restaurant owners are required to pay a minimum hourly rate of $2.13.

That said, different states have their own laws that govern tipped minimum wage. Currently, states fall into one of three categories:

  1. States that require you to pay tipped employees full state minimum wage before tips. For example, California’s state minimum wage for all employees regardless of tips is $15 per hour.
  2. States that require you to pay tipped employees a base minimum wage above federal tipped minimum wage. If you’re located in one of these states, you’re required to pay an hourly rate greater than the federal standard of $2.13 per hour.
  3. States that require the federal tipped minimum wage of $2.13 per hour.

Not sure about your state’s tipped minimum wage? See a full breakdown on the DOL website.

What is a tip credit?

The Fair Labor Standards Act also allows employers to use a $5.12 tip credit toward the cost of paying tipped restaurant workers federal minimum wage. In simple terms, a tip credit allows you to pay your tipped worker a lower wage than the federal requirement.

Here’s an example:

  • Federal minimum wage ($7.25) – tip credit ($5.12) =  Minimum cash wage ($2.13)

Ideally, a tipped worker would earn enough tip income to raise their wages back up to or above federal minimum wage. But if they don’t reach the minimum wage rate, it’s up to you to cover the difference. 

Additionally, there are several things you need to keep in mind when it comes to claiming a tip credit:

  1. As an employer, you need to inform employees when they’re being paid a tipped minimum wage either verbally or in writing.
  2. States set their own tip credit according to their state minimum wage, which means it can be higher or lower than federal minimum wage depending on your location.
  3. Overtime must be calculated based on the full minimum wage, not the tipped minimum wage.

Lastly, it’s also very important to know that tip credits can only be applied against an employee’s time performing tip-producing work (such as bussing and serving tables). As of December 2021, labor law dictates that tipped employees must be paid the full minimum wage if they spend more than 20% of their time performing non-tipped work. In other words, if you ask restaurant workers to spend too much time washing dishes or taking out the trash, you’ll have to pay them a higher hourly wage.

3 ways to tip your restaurant employees

Every restaurant needs a tip policy. Otherwise, tipping can become disorganized very quickly, which means some employees may not be tipped out correctly.

To avoid any mishaps and ensure everyone gets the fair wage they deserve, it’s best to decide on a system. Let’s take a look at the pros and cons of three common tipping policies:

Everybody keeps their tips

In this scenario, every worker walks away with the amount of tips they earned at the end of their shift. 

  • Pros: The benefit of this method is that it’s simple and straightforward.
  • Cons: On the other hand, only front-of-house employees would receive tips. Employees who work in the back of the house, such as a dishwasher, might be upset they aren’t involved in the tipping process.

Tip sharing

Tip sharing is when tips are split amongst tipped and non-tipped employees, normally based on hours worked or role in the restaurant.

  • Pros: Tip sharing ensures all employees receive tips regardless of how they contribute to the business.
  • Cons: This policy can complicate payroll because you still need to make sure non-tipped employees are being paid minimum wage in addition to tips. Meanwhile, you also need to keep track of tip credits for tipped employees even if their tipped wages are being split. 

Tip pooling

Under a tip pooling policy, tips are distributed evenly at the end of the shift between both the front and back of house.

  • Pros: Tip pooling is equitable, which means all employees receive a fair hourly wage.
  • Cons: The FLSA regulates tip pooling. Tip credits can’t be applied to employees’ wages if they share tips with non-tipped staff, meaning they need to be paid full minimum wage. Additionally, staff may not be happy that their tips are being split if other employees aren’t pulling their weight on the job.

How to manage changes in minimum wage

When you own a restaurant, a minimum wage increase has a significant impact on your business. On one hand, your employees can earn more for their hard work. But on the other, rising labor costs might start shrinking your profits.

Consequently, prices at restaurants are increasing 4% on an annual basis, according to Restaurant Business Online. Luckily, there are other ways to mitigate a minimum wage increase. Here are a few strategies you can use to offset the rising cost of labor:

  • Reducing fixed costs: Maximize the profitability of your busiest periods by reducing your hours of operation, thereby cutting back on unnecessary operating expenses like wasted electricity or labor.
  • Optimizing prices: Get creative with your pricing strategy instead of merely hiking up prices at random. Strategically manipulate prices based on customer demand. For example, increasing the price of a high-margin item that people frequently purchase can help improve your profits.
  • Focusing on retention: Researchers estimate that the cost of replacing an employee is often twice that worker’s annual salary, considering you have to spend time and money recruiting and training their replacement. Focus on keeping staff happy and retaining as many employees as you can. Not sure where to start? Check out this blog to learn more.
  • Investing in technology: Restaurant technologies are made to take the pain out of restaurant management. With the right technologies on your side, you can boost the profitability of your business and stay afloat in the competitive restaurant industry.

Better yet, why not invest in a solution that offers all of these strategies in one? As a Grubhub restaurant, that’s exactly what you get.

When you list your restaurant on Grubhub Marketplace, you’re where 33+ million diners are discovering their next meal. With that kind of exposure, you can take advantage of Grubhub’s promotion and loyalty tools to drive customer traffic and increase your revenue potential, allowing you to pay workers the wages they deserve.

And with Grubhub Delivery, you can leverage the benefits of online food delivery without increasing your overhead costs. Why? Because we handle driver compensation, insurance and tips. In other words, you won’t need to worry about the cost of their labor — that’s on us.

So, ready to improve your operations? Sign up with Grubhub for Restaurants today.