According to the National Restaurant Association, there are nearly 15.7 million people employed in the U.S. restaurant industry as of 2024. The vast majority of these employees have one thing in common: They work as tipped employees.
As a restaurant employer, it’s your responsibility to provide a fair wage for your staff members. It’s the right thing to do, but it’s also the law. At the same time, you must be aware of the rising cost of labor across the industry. To find the right balance, you must understand the nuances of server minimum wage and the employment labor standards that hold you accountable.
Minimum wage in the restaurant industry
In the United States, the Fair Labor Standards Act (FLSA) is the primary law that establishes employer requirements for minimum wage, overtime pay, and recordkeeping. Under the FLSA, the federal minimum wage is $7.25 per hour in 2024.
In the restaurant industry, the federal minimum wage varies based on the type of employee. Generally, restaurant employees fit into one of two categories:
- Tipped employees. The federal government defines tipped employees as those who earn more than $30 in tips every month. Your state may set a higher or lower threshold. In Arkansas and Hawaii, for example, staff members qualify as tipped employees if they make $20 or more in monthly tips. In South Dakota, the lower limit is $35 per month.
- Non-tipped employees. These workers don’t regularly receive tips that meet the state or federal minimum tip threshold. They must receive at least the federal minimum wage.
Things are different for tipped employees. Because they receive extra compensation, you can pay them a base “tipped minimum wage” of $2.13 per hour. Depending on state labor law, employers may be able to use a tip credit to reach toward the state or federal minimum wage obligation.
Your state may require you to pay tipped employees:
- The full state minimum wage before tips
- A base minimum wage above federal tipped minimum wage
- The federal tipped minimum wage of $2.13 per hour
Exploring minimum wages per state
Minimum wage and tipped minimum wage vary from state to state. Let’s take a closer look at how these laws work in the three main state categories:
- Tipped employees earn the full state minimum wage before tips. In these states, you can’t count tips toward the minimum wage requirement. In California, restaurants must pay tipped employees $16 per hour; tips are extra.
- Tipped employees earn a base minimum wage that’s higher than the federal tipped minimum wage. If you’re located in one of these states, you must pay a base hourly rate greater than the federal standard of $2.13 per hour. In Arizona, for example, you must pay the tipped minimum wage of $11.35 per hour; you can use up to $3 per hour as a tip credit to get to the state minimum wage of $14.35 per hour.
- Tipped employees earn the federal tipped minimum wage. In these states, you can pay $2.13 per hour to tipped workers. Most states with this requirement also use the federal minimum wage of $7.25; exceptions are Nebraska and Virginia, which have a minimum wage of $12.
How do different states calculate minimum wage?
Here’s a look at the factors that affect how different states calculate tipped minimum wage:
- Federal tipped minimum wage. All states must meet the federal minimum wage standards: $2.13 per hour for tipped employees and $7.25 for all employees.
- State minimum wage laws. Many states have additional laws to benefit employees.
- Tip credit. In some cases, employers can use part of an employee’s tips to reach the state or federal minimum wage.
- Direct wage. This is the base-level hourly rate that employers must pay tipped employees. It can be as low as $2.13 per hour.
- State-specific regulations. Some states have different rules for each type of restaurant. In Minnesota, for example, large employers must pay a minimum wage of $10.85 per hour; small employers pay $8.85.
- Service charge vs. tip. Tips are discretionary; employers aren’t allowed to take any portion. Service charges are mandatory. Depending on state law, employers may be able to keep a percentage.
Want to see how your state stacks up? See a full breakdown on the DOL website.
What is a tip credit?
We’ve been talking about tip credits — but what are they, exactly? Tip credits are a provision of the FLSA that allows employers to count part of an employee’s tips as a credit toward the applicable minimum wage. Let’s use the federal standards as an example:
Federal minimum tipped wage ($2.13) + tip credit ($5.12) = Federal minimum wage ($7.25)
The maximum allowed tip credit varies by state, depending on the state minimums for tipped and cash wages. In Colorado, the tipped minimum wage is $11.40 per hour; the state minimum wage is $14.42. That means employers can claim a tip credit of up to $3.02 per hour. States that require restaurants to pay the full state minimum wage don’t allow tip credits.
Key things to keep in mind when claiming a tip credit:
- Minimum wages can change — make sure you have the current numbers.
- If you’re paying a tipped minimum wage, you must let employees know verbally or in writing.
- When employees work overtime, you must calculate overtime pay based on the full minimum wage rather than the tipped minimum wage.
Recognizing the 80/20 Rule
Here’s another important thing to know about tip credits: They can only be applied against an employee’s tip-producing work. In this context, “tip-producing work” includes jobs that receive tips and work that directly supports tip-producing work.
To determine when employees are doing tip-producing work, use the 80/20 Rule. It states that you can’t take tip credits when:
- Employees spend more than 20% of their weekly hours doing non-tipped work.
- Employees do non-tipped work for more than 30 minutes at a time.
If a server spends an hour washing dishes, for example, you can’t take a tip credit for those hours; you must pay the full minimum wage. You’ll also forfeit the tip credit for the entire week if an employee spends more than 8 of their 40 weekly hours on tasks such as making coffee, sweeping and mopping floors, restocking supplies, or preparing ingredients.
Discover 3 ways to tip your restaurant employees
There are three common ways to tip your employees:
- Everybody keeps their tips. This method is simple and straightforward, but it’s biased toward front-of-house employees. Dishwashers and bussers miss out.
- Tip sharing. With this method, servers and bartenders voluntarily give a portion of their tips to non-tipped employees. It ensures everyone gets something, but it can make payroll more complicated.
- Tip pooling. Part or all of servers’ and bartenders’ tips are pooled and split among all employees according to job and hours worked. Again, everyone gets something, but it can create divisions if certain employees aren’t perceived as pulling their weight. You also need to adhere to FLSA regulations regarding tip pooling; if all tips are pooled, you must pay all employees the full minimum wage. Want to learn more? Here’s what you need to know about tip pooling.
Managing changes in minimum wage effectively
When you own a restaurant, minimum wage increases have a big impact on your bottom line. To protect their profits, many restaurants respond by charging more for food. Prices at restaurants are increasing 5.1% on an annual basis, according to the U.S. Bureau of Labor Statistics.
Here are a few strategies you can use to offset rising labor costs:
- Reduce fixed costs. Reduce your hours of operation during slow periods to reduce labor requirements, cut utility costs, and maximize profitability.
- Optimize prices. Use strategic menu price increases on popular or high-margin items to boost profits.
- Focus on retention. It costs 50% to 200% of an employee’s annual wages to replace them. To reduce hiring and training costs, find ways to reduce burnout and engage employees.
- Invest in technology. Use restaurant technology to automate repetitive tasks and streamline workflows.
Better yet, why not invest in a solution that rolls all these strategies into one package? As a Grubhub restaurant, that’s exactly what you get.
Effortless delivery, elevated revenue: The Grubhub advantage
When you list your restaurant on Grubhub Marketplace, you’ll get in front of 33+ million diners looking for their next meal. With that kind of exposure, you can use Grubhub’s promotion and loyalty tools to drive customer traffic and increase your revenue potential, which makes it easier to pay workers the wages they deserve.
With Grubhub Delivery, you can leverage the benefits of online food delivery without increasing overhead costs. We handle driver compensation, insurance, and tips, so you don’t have to worry about the cost of their labor — that’s on us. Are you ready to improve your operations? Get started with Grubhub today.
