Winter 2006-07 Automatic gratuities are not tips

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Number 62
Winter 2006

Automatic gratuities are not tips

Employers that apply the Fair Labor Standards Act "tip credit" to satisfy their minimum wage obligations to service employees must be aware that automatic tips charged to customers are not tipped income. Such automatic charges are considered "service charges."

Minimum wage credit

Pursuant to the FLSA, employers may take a tip credit to satisfy the minimum wage requirements for an employee who "customarily and regularly receives more than $30 a month in tips." The FLSA allows employers to pay such employees $2.13 per hour if the employer makes the difference of the $5.15 minimum wage in tips earned.

The Department of Labor has ruled that automatic tips charged to the customer are not tips, the employer may not take a "tip credit" and must, therefore, pay the entire minimum wage and overtime required by the FLSA.


This means that employers who claim a tip credit must pay the employee for overtime work performed based on a regular rate of pay that does not include tips earned in excess of $5.15 per hour because tips are not wages. However, if the employee receives the tips as service charges the overtime pay must be based on a regular rate that takes into account all service charges.

© 2006 Goldman Antonetti & Cordova, LLC