Colorado Tip Laws: An Employer’s Guide to Compliance and/Fees

 

Colorado isn’t making life easy on restaurant owners. Tip laws differ from national standards in some areas, and staying on top of potential changes as bills make their way through the legislative process takes time and energy. Nonetheless, it’s important to be aware of and master the rules around wages and tips because even one mistake can throw off your payroll and drain your margins.

What counts as a tip in Colorado?

Under Colorado law, a tip is defined as a voluntary amount of money decided by the customer and given directly to the employee who provided the service. This includes a customer writing in a tip on a credit card receipt, cash left on the table after a meal, and a verbal promise followed by a direct cash handoff.

In all these cases, the tip is not controlled by the restaurant, and it belongs 100% to the employee. Neither managers, supervisors, nor the house can take any portion of that tip unless it’s part of a valid tip pool under the law.

This matters because only voluntary tips can be used to apply the tip credit. That means if you’re paying tipped employees the reduced cash wage, those tips must legally bring them up to the full minimum. If they don’t, you owe the difference in wages in cash.

There’s also a tax side. All employee tips must be reported through payroll and are subject to FICA taxes. You’ll need to keep accurate tip records not just for compliance, but to avoid issues in case of an audit.

What’s a service charge?

A service charge is a mandatory fee that the restaurant adds to the bill. Common examples include an automatic 20% fee for large parties or a flat charge for bottle service. It’s considered business revenue and belongs to the restaurant unless you choose to pay it out.

Because a service charge isn’t a tip, you cannot add it to the tip credit to reach the minimum hourly wage. If you do decide to share service charge revenue with tipped employees, it must be taxed like regular wages, not as employee tips.

Many managers fall into the trap of labeling a mandatory service charge on the check as a “gratuity” or “tip” to the guest. However, they then treat it as restaurant revenue or split it with supervisors or BOH staff. That’s a big mistake.

If the guest was led to believe the charge was a tip, Colorado law says it must go only to tipped employees, and only through a legal tip pool. Otherwise, you’re risking legal action and tip credit disqualification.

To avoid problems, you should make it clear on receipts or verbally say that “This is a service charge, not a gratuity.“ If you’re not giving it to the server, don’t call it a tip. Also, if you’re sharing it, make sure it goes only to tipped employees and that it’s taxed correctly.

Who qualifies as a tipped employee?

To be considered a tipped employee in Colorado, the worker must regularly and customarily receive over $1.64 per hour in tips. If they earn less than that, they don’t qualify, and you must pay them the full state minimum wage.

This rule goes beyond just job titles. It’s not enough to call someone a server or bartender. What matters is the actual work they perform during their shifts.

Roles like waitstaff, bartenders, and bussers typically meet the standard—because they’re in direct contact with guests and usually receive tips. But even in these positions, managers and supervisors must keep an eye on tasks.

If the employee spends too much time doing non-tipped work (like cleaning, prepping food, or restocking), they may no longer qualify under the 80/20 rule. That could mean losing tip credit privileges.

Only tipped employees can legally be paid the reduced cash wage. If someone doesn’t meet the qualifications or if they lose eligibility during a shift, you must bump their wages to the full state minimum wage.

80/20 rule

Employers must be aware of the 80/20 rule when using the tip credit. It states that employees must not spend more than 20% of their weekly hours on non-tipped tasks. Additionally, they shouldn’t be doing non-tipped work for over 30 minutes in a row.

Directly supporting duties, like rolling silverware, refilling condiments, restocking napkins or service items, and prepping coffee or ice for drink service, are acceptable. However, cleaning bathrooms and the kitchen, or mopping, sweeping, and washing windows, don’t count toward the tip credit.

If your team goes over either limit, you must pay them the full minimum wage for all of that time. You also lose the tip credit for those hours, even if the employee still earned tips during their shift.

Minimum and tipped wage structure

In 2025, Colorado’s minimum wage is $14.81 per hour, more than double the federal minimum. This will rise to $12.14 per hour in January 2026.

If your staff earns tips, you’re allowed to apply a tip credit of up to $3.02 per hour. This means you can pay tipped employees a reduced cash wage of $11.79 per hour, as long as their tips cover the difference.

As an employer, you have a legal duty to make sure each tipped employee earns at least $14.81 per hour when you combine cash wages and tips. If a server has a slow week and their tips don’t make up the full amount, you’re required to make up the difference in cash.

You can’t just assume it all averages out. Colorado law requires weekly verification. Every week, you need to confirm that each tipped employee met or exceeded the total required wage. If you don’t, and you’re audited, you could lose the tip credit for all affected hours. That means you’d owe back pay at the full rate, even if the employee earned tips.

Cities and counties like Denver, Edgewater, and Boulder also have higher minimum wages, which override the state rate. The highest wage ranges from $15.57 to $18.81 per hour. Nonetheless, these areas still follow the $3.02 tip credit.

Tip pools and ownership rules

A tip pool is when tipped employees agree to share a portion of their tips with other eligible team members. This can be a great way to build teamwork, but only if you follow local restaurant tip pooling laws.

The tip pool should be voluntary and must include only the right people. Managers, supervisors, and BOH staff aren’t allowed to be part of any tip pool: If you include anyone from that list, you immediately lose the tip credit for everyone. Even worse, if you’ve been doing this for a while, you could owe back pay for every affected hour.

Credit cards and processing fees

Colorado doesn’t allow employers to deduct processing fees from credit card tips, no matter how small it might seem. Federal law allows this as long as restaurant owners only deduct the amount that payment companies charge them. However, the Centennial State is stricter and gives full tip ownership to the employees.

Even if it’s unintentional, deducting fees from tips is a fast way to end up on the wrong side of a labor audit. Make sure your managers, payroll leads, and bookkeepers are all trained on Colorado’s tip laws to protect your business.

Overtime pay rules for tipped employees

The state also has strict overtime pay rules. It’s not just 1.5x the minimum wage, and there are more factors to consider. Overtime pay kicks in when an employee works more than 40 hours in a week or when they work over 12 hours in a single day.

An employee must also be paid overtime if they work 12 or more consecutive hours, even if it spans multiple shifts. Although you should note that meal breaks don’t count toward total hours if they’re duty-free, meaning they have complete freedom and there’s no work expected from them, nor are they “on-call.”

When calculating overtime, you must use the regular rate of pay, which includes the cash wage you pay plus all tips received during the workweek.

To find the regular rate, divide the employee’s total earnings (cash wages + tips) by total hours worked. Then, multiply that number by 1.5 to calculate their overtime pay.

Let’s say a server works 46 hours during a busy holiday week, and they earn a base cash wage of $11.79 per hour and receive $400 in tips over the week. To calculate their regular rate of pay, you’d add their cash wages (46 hours × $11.79 = $542.34) to their tips ($400), for total earnings of $942.34.

Then divide that by 46 hours: $942.34 ÷ 46 = $20.48. That’s their regular rate. Now, take the 6 overtime hours and multiply by 1.5: $20.48 × 1.5 = $30.72. So for those 6 hours of overtime, they must be paid $184.32, not just time-and-a-half based on the $11.79 base wage. If you underpay even one of those hours, it can trigger back pay and penalties under Colorado law.

Required notices and record-keeping

You must notify employees in advance if you’re applying the tip credit. This notice has to be in writing and should clearly state the base wage, the exact tip credit amount being claimed, and ensure that the employee’s total pay (wages + tips) must equal or exceed $14.81 per hour.

You must also provide this notice in the employee’s preferred language. It’s best to have employees sign the notice to confirm they’ve read and understood it. This protects both your business and your team.

In addition to a written notice, you also need to post the 2025 COMPS Order poster in a spot where all staff can see it, like the break room. This poster includes important details about employee rights, wage laws, and tip rules.

For records, under the Colorado Employment Security Act (CESA), you’re required to keep key payroll and tip records for five years. That’s longer than federal law, and it’s non-negotiable.

Each employee file must have daily tip totals, tip pool distribution records, signed copies of tip policies or agreements, weekly compensation audits that show earnings of at least $14.81 per hour, and shift logs that document side work. These records must be ready for inspection if you’re ever audited.

Recent state legislation in Colorado that affects tips

The most significant update is House Bill 25-1208 (HB25-1208), signed into law in June 2025, with major changes taking effect in January 2026. Before this, all Colorado employers were limited to the statewide fixed tip credit of $3.02 per hour, no matter how high the local minimum wage was. This created a burden for restaurants in cities like Denver or Boulder, where the local minimum wage far exceeded the state minimum wage.

With HB25-1208, local governments will have the option to increase the allowed tip credit in their jurisdictions. This means they can allow restaurants to use a higher tip offset, reducing the cash wage required for tipped employees, as long as they don’t go below the state floor of $11.79 per hour.

If your restaurant operates in a city like Denver, where the local minimum wage is $18.81 per hour, that tipped cash wage could drop back down to $11.79 per hour if the local government chooses to adopt the higher tip credit.

Compliance shouldn’t be complicated

Tips laws in Colorado are stricter compared to other states, and there’s very little room for error. But with clear processes and proactive training, you can stay compliant while still keeping your payroll manageable.

Having the right tools can also help you track and distribute tips and pay accurately. 7shifts’ restaurant payroll software integrates with your POS system and automates tip pooling, wage calculations, and scheduling. It gives you confidence that every payout is accurate and compliant with Colorado labor laws.