Year-End Tips on Tips for the Hospitality Industry

Quick Hits

• The One Big Beautiful Bill Act (OBBB Act), which was enacted in 2025, eliminated taxes on tips and overtime through 2028, prompting the IRS to issue guidance that underscores the importance of employer compliance with tip laws.
• Employers taking a tip credit under the FLSA must provide specific notice to employees about their direct wage, tip credit amount, and tip retention rules, with failure to comply potentially resulting in invalidated tip credits and liquidated damages.

The Fair Labor Standards Act (FLSA) requires employers that take a tip credit (i.e., pay eligible employees subminimum wage and rely on tips to meet minimum wage) to provide specific tip credit notice to employees. Notice must include:

1. the amount of the direct (or cash) wage the employer is paying a tipped employee, which must be at least $2.13 per hour;
2. the additional amount claimed by the employer as a tip credit, which cannot exceed $5.12 (the difference between the minimum required direct (or cash) wage of $2.13 and the current minimum wage of $7.25);
3. that the tip credit claimed by the employer cannot exceed the amount of tips actually received by the tipped employee;
4. that all tips received by the tipped employee are to be retained by the employee except for a valid tip pooling arrangement limited to employees who customarily and regularly receive tips; and
5. that the tip credit will not apply to any tipped employee unless the employee has been informed of these tip credit provisions.

Failure to comply with these notice requirements can result in significant exposure for employers, including invalidating the tip credit and being subject to liquidated damages. Employers may also need to comply with more rigorous state law notice requirements.

If a tip credit is taken, eligible participants in a tip pool are limited to employees in occupations in which they customarily and regularly receive tips, such as waiters, bellhops, counter personnel (who serve customers), bussers, and service bartenders. If no tip credit is taken, employers can include back of house employees in the tip pool. Some state laws, however, restrict eligible participants even when all employees are paid full minimum wage. Under no circumstances can an employer ever permit supervisors or managers to receive distributions from a tip pool or tip share, and the company can never keep tips.

Ogletree Deakins’ Hospitality Industry Group and Wage and Hour Practice Group will continue to monitor developments and will post updates on the Hospitality and Wage and Hour blogs as additional information becomes available.

Further information on minimum wage rates and requirements can be found in the Ogletree Deakins Client Portal, including minimum wage and minimum wage tip credit law summaries. (Full law summaries are available for Premium-level subscribers; Snapshots and Updates are available for all registered client-users.) For more information on the Client Portal or a Client Portal subscription, please reach out to clientportal@ogletree.com.

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