You received great service and want to reward your waiter. But your server may not be receiving the entire tip you left. Some restaurants and food establishments are quietly subsidizing their labor costs instead of letting workers keep their tips.

But is this legal? Restaurateurs have been legally taking tips to supplement payroll. It’s allowed by the federal government, but some states have changed that. Food-delivery services also have been accused of this practice.

Tipped Employees Under the Fair Labor Standards Act

The Fair Labor Standards Act (FLSA), according to the Department of Labor, allows employers to take a tip credit toward their minimum wage and overtime obligations for tipped employees.

Employers that claim a tip credit must ensure that the employee earns enough tips from customers and that the employee’s direct wages per work week equal at least the minimum wage and overtime compensation.

If an employee’s tips combined with employers’ direct wages don’t equal the $7.25 federal minimum hourly wage each workweek, the employer must make up the difference.

The maximum tip credit available is currently $5.12 per hour. This can ultimately subsidize labor costs because the employer would pay only $2.13 of the minimum wage, and your tip would make up the difference.

This system shifts the basic labor costs to you and masks wage volatility for workers.

Credit Card Payments and Tips

Credit card companies require employers to pay a percentage of sales as a processing fee. Under the FLSA, the employer may pay the employee tips minus this percentage.

For example, if a credit card company charges an employer 3 percent on all sales for its service, the employer may pay the tipped employee 97 percent of the tips without violating the FLSA.

This saves the employer the fee payment.

Mandatory Service Charges on Large Party Bills

Often, when you are eating out with a large group, a mandatory 15 percent service charge is added to the total bill. The assumption is that this fee goes to the server. But this isn’t necessarily the case.

A compulsory service charge is not considered a tip under the FLSA. But although they are not tips, they may be used to satisfy the employer’s minimum wage and overtime pay obligations. In other words, since they aren’t considered tips, the employer can use them however they want.

Most customers don’t tip on top of the compulsory charge because they don’t realize the charge is unlikely to reach the server.

Sharing a Tip Pool

The FLSA allows employers to require employees to share or “pool” tips with eligible employees. This could be bussers, dishwashers, hosts or hostesses, or even chefs. In theory, it helps promote fairness since all these people enable good service.

There are two kinds of tip pools. One is the “traditional” and the other is the “nontraditional.”

A traditional tip pool is when employees regularly receive tips. This could be servers, bussers, bartenders, etc. For this type of pool, the tip credit can be used.

A nontraditional tip pool is for everyone, regardless of whether they usually receive tips or not. This could apply to cooks or dishwashers. With a nontraditional pool, the tip credit cannot be used.

Managers and supervisors can’t take part in a tip pool.

Individual States May Have Different Requirements

Often, state laws differ from the federal FLSA. In that case, the employer must comply with the standard most protective of the employee.

Some states, such as California and Washington, have higher minimum wages than the federal minimum wage, according to the National Conference of State Legislatures. California’s is $16.50, and Washington’s is $16.66.

Employers keeping tip credits is also illegal in some states. For example, California prohibits employers or their agents from sharing in or keeping any portion of a gratuity given to any employees by a patron, according to the State of California Department of Industrial Relations.

They also can’t deduct credit card processing fees or costs from tips.

Delivery Apps and Guaranteed Payout

Although it depends on employment status and state, delivery apps such as Grubhub and DoorDash can use a tip credit for their food delivery drivers.

But, as mentioned, some states or districts don’t allow tip credit. One of these was Washington. In 2020, the district didn’t allow tip credit, and DoorDash found itself in hot water: it used customer tips to cover its guaranteed payout.

Many drivers saw their base pay fall dollar for dollar until the tip exceeded the guarantee. In 2020, the Office of the Attorney General for the District of Columbia announced a settlement with DoorDash that required it to pay $2.5 million. It was found to have misled D.C. consumers and used tips left for workers to boost the company’s bottom line.

But since then, according to Nation’s Restaurant News (NRN), in 2025, the D.C. City Council voted to permanently reinstate the tip credit.

Tip Credit Reduces Restaurants’ Labor Costs

The tip you leave may not go entirely to your server. Restaurants and any other industry where employees are tipped can supplement employees’ pay through the tip credit.

The credit card-processing fee can also be passed on to the employee. The next time you’re eating dinner or ordering through a delivery app, consider leaving a cash tip.

The Epoch Times copyright © 2025. The views and opinions expressed are those of the authors. They are meant for general informational purposes only and should not be construed or interpreted as a recommendation or solicitation. The Epoch Times does not provide investment, tax, legal, financial planning, estate planning, or any other personal finance advice. The Epoch Times holds no liability for the accuracy or timeliness of the information provided.