Alabama Tip Laws for Employers (2025)

 

Alabama doesn’t have its own tipping laws. It follows the federal Fair Labor Standards Act (FLSA) when it comes to how tips, tip pooling, and wages are handled. While that might sound straightforward, it also pressures employers to get every detail right or risk potential legal challenges. You need to know the rules inside and out and leverage technology to make your life a bit easier by automating calculations and compliance.

What counts as a tip in Alabama?

Under federal wage laws, a tip is money a customer voluntarily gives to a server, bartender, or any employee who usually gets tipped for providing service. The amount is totally up to the customer, and it belongs 100% to the employee. It’s different from a mandatory service charge, which is set by the business and listed on the bill.

True tips aren’t subject to the same taxes as service charges, which are treated like regular wages. That changes how they show up on paychecks and tax forms, and if you get it wrong, it could incur IRS penalties.

Who qualifies as a tipped employee?

Under federal tipping laws, a tipped employee is someone who regularly earns more than $30 a month in tips. If your employee doesn’t meet that threshold in Alabama, you can’t legally apply a tip credit to their wages.

Most FOH staff, like servers, bartenders, and bussers, clearly qualify as tipped employees. These are the people who interact directly with customers and usually receive tips as part of their daily work. However, BOH workers, like dishwashers, line cooks, or prep staff, don’t qualify unless you’re paying them the full minimum wage without using the tip credit.

This also matters when it comes to following restaurant tip pooling laws. If you’re claiming a tip credit to pay the minimum cash wage of $2.13 per hour, only employees who customarily receive tips can be included in a tip pool.

What’s the tipped minimum wage in AL?

In Alabama, you can pay tipped employees a direct cash wage of $2.13 per hour, as long as their tips bring their total hourly earnings up to the Alabama minimum wage of $7.25, which is the same as the federal rate.

The $5.12 difference is considered the tip credit. You must always make sure that their combined cash wage and tips hit at least the minimum every single week. If they don’t, you’re responsible for covering the gap.

For example, if a server has a slow week and only makes $100 in tips after working 30 hours, that puts their total pay below minimum wage. You would need to step in and add enough wages to bring their total up to at least $217.50 for the week (30 x $7.25 per hour).

How tip credits work

To start, the employee must qualify as a tipped worker, someone who regularly earns more than $30 a month in tips. Second, you must give them notice that you’re using the tip credit. This notice can be written or verbal, but putting it in writing is the safest way to document it.

The employee must then be allowed to keep all their tips, unless they’re part of a valid tip pooling arrangement. And finally, their total pay (cash wage plus tips) must always add up to at least $7.25 per hour. If it doesn’t, you have to pay the difference.

Now, what if your staff do more than one kind of job during a shift? That’s where the dual job rule comes in. The FLSA lets you apply the tip credit to non-tipped work, but only if the tasks are related to bartender or server duties and are done immediately before, during, or after the tipped work.

These are tasks like rolling silverware, prepping drink stations, or restocking napkins. You can’t use the tip credit if the employee is doing unrelated work, like deep cleaning the walk-in fridge or running errands, especially if there’s a big gap between that task and their regular service duties.

To stay compliant, you need to track everything. The best way to do that is with a weekly calculation. Look at how many hours the employee worked, how much they earned in tips, and whether the total meets the required minimum wage.

Let’s say a server works 30 hours in one week. You pay them the minimum cash wage, which comes out to $63.90 for that week. They also earn $150 in tips. Add the cash wage and the tips, and their total pay is $213.90.

To check if that meets the required minimum wage, divide $213.90 by 30 hours. That gives you $7.13 per hour, which is just under the required. In this case, you would need to make up the difference by adding $3.60 to their paycheck, so their hourly average hits the federal minimum.

A task management tool can also help you create daily or weekly checklists for FOH and BOH staff. This way, you can track non-tipped work accurately.

Rules for tip pooling and distribution

Federal tipping laws require employers to notify employees if they plan to set up a tip pool. This notice can be verbal, but written is better for recordkeeping. If you’re using the tip credit to pay less than the standard minimum wage, only tipped employees can take part in the pool.

There are two types of tip pools: traditional and nontraditional. A traditional tip pool happens when you’re taking the tip credit. In this case, only tipped workers can be included.

A nontraditional tip pool is used when you pay everyone the full minimum wage and don’t take the tip credit. In that case, you’re allowed to include BOH staff like prep cooks, line cooks, or dishwashers in the pool.

Each setup has its pros and cons. Using the tip credit helps you manage labor costs, but it limits who can join the tip pool. Paying full minimum wage gives you more flexibility and may help with BOH morale and retention, especially if you’re trying to run a tight kitchen with fewer staff.

An important rule to remember is that managers, supervisors, and owners can’t receive tips from the pool, even if they help run the service. The only exception is if they personally serve customers, like a manager who covers a table during a rush. Even then, they can only keep the tips they earned directly, not a cut from the pool.

Overtime pay for tipped employees in Alabama

If someone works over 40 hours in a week, you must pay them 1.5x their regular hourly rate. Even if you’re using the tip credit, overtime rules still apply. The regular rate for overtime in Alabama includes both the cash wage you pay ($2.13 per hour) and the value of the tip credit (up to $5.12 per hour).

So, instead of calculating overtime on just $2.13 per hour, you base it on the full $7.25 per hour minimum wage. That means the overtime rate is at least $10.88 per hour (1.5 × $7.25), and you can still take the tip credit, just not off the full amount.

There’s one local detail to note: Alabama had a temporary tax break on overtime wages, but it expired in June 2025. That tax break helped lower the tax burden for some restaurants, but now it’s gone. So starting July 2025, all overtime wages must be fully taxed and reported again, just like regular pay.

Credit card tips and fees

Credit card tips work just like cash tips, which belong to the employee. Even though the customer pays using a card, the tip still goes to the server, bartender, or other tipped employee who earned it. You can’t keep those tips or use them to cover other costs. That’s a clear rule under federal tipping laws.

However, as an employer, you can deduct a small portion of the tip to cover credit card processing fees. But this has limits. You’re only allowed to take out the exact percentage that your payment processor charges. For example, if your card processor charges a 3% fee, you can subtract 3% from the tip before paying it out. If you take more than that, it’s a wage violation.

You also need to make sure that credit card tips are paid out by the regular payday for the workweek in which they were earned. You can’t delay payment just because the money came in through a card. Waiting too long could put you out of compliance with federal wage laws.

Another thing to keep in mind is that Alabama allows credit card surcharges. These are extra charges you can add to a customer’s bill to offset processing costs. But those surcharges are taxable business income and have nothing to do with employee tips. You can’t count them as part of a tip pool or apply them toward the tip credit.

Record-keeping and reporting requirements

You need to keep a record of hours worked for each tipped employee. That means clock-in and clock-out times for every shift. You also need to track all tips received, whether they’re cash or credit card tips, and how those tips are distributed in a tip pool if you use one.

You must also keep proof that you gave notice to your employees about using the tip credit. As mentioned, written records are safer and easier to show if there’s ever an audit or complaint.

You’re required to keep wage records for at least three years, including details like hourly pay, tip credit amounts, and total earnings. Any supporting documents, like job descriptions, employee evaluations, and your tip pooling policy, should be kept for at least two years.

Good records protect your business. If a wage complaint ever comes up, solid documentation will show that you followed the law and paid your employees correctly.

Mastering tipping laws

For restaurant operators in Alabama, tipping laws come down to one thing: follow the FLSA to the letter. That means making sure tipped workers always hit the minimum wage, applying tip credits only when allowed, and paying overtime correctly. Every detail matters, and keeping your processes tight is the best way to avoid legal headaches.

Keep track of tips easily with 7shifts’ tip management software. Our tool automates pooling, applies the correct rules, and pays your staff on time, every time. Your employees get transparency, and you get confidence that you’re doing it right.