Indiana Tip Laws for Employers

 

Understanding Indiana’s tip laws is pretty easy. The state follows the FLSA standards to the letter, only establishing state-specific rules when it comes to penalties for tip law violations. If you want to cultivate healthy staff relationships and keep your business running smoothly, knowing the ins and outs of state tip laws is essential. Our guide outlines Indiana’s guidelines for tip ownership, tip credits, tip pooling, and more.

What is a “tip” in Indiana?

Indiana adheres to the Fair Labor Standards Act (FLSA) guidelines, which define a tip as a sum of money a customer gives an employee outside the advertised cost of a product or service. For payments to count as tips, customers must give them voluntarily (rather than as part of a mandatory charge) and determine the amount without the influence of the establishment.

Tips are the property of the employee. Employers may not handle tips unless they redistribute shares under a valid tip pool.

What is the difference between a tip and a service charge?

While tips and service charges are both gratuities paid on top of the cost of a product or service, the FLSA treats them as legally distinct. Tips are voluntary payments a customer gives directly to an employee, while service charges are mandatory fees the employer adds to the bill. Tips count as employee income; service charges count as business revenue.

Employers may distribute service charges however they choose. But even if they use them to cover labor costs, service charges don’t count as tips, since the customer didn’t give them voluntarily or set the amount.

Who qualifies as a tipped employee in Indiana?

Not all employees who earn tips count as tipped employees. This distinction matters because under the FLSA, only eligible tipped employees can be part of tip pools or count toward an employer’s tip credit. To count as a tipped employee in Indiana, a worker must meet the following criteria:

• Regularly earn at least $30 in tips per month.
• Work in a role where tipping is customary and expected. Examples include servers, bartenders, baristas, food runners, and bussers.

If an employee fails to meet the above standards, employers must pay them full minimum wage.

Minimum wage and tip credits in Indiana

The minimum wage in Indiana is $7.25 per hour, aligned with the federal standard. Meanwhile, the minimum wage for tipped employees is $2.13 per hour. This means that employers may claim up to $5.12 per hour in tip credits from the base wages of employees who meet the tipped employee criteria.

Indiana tip credit rules

Indiana follows federal guidelines to manage tip credits. These rules outline who qualifies as a tipped employee, how employers can use the credit, and what steps to take if an employee’s total pay doesn’t meet minimum wage.

When can employers claim tip credit?

Employers may only claim tip credit from eligible tipped employees. This means that the employees must work in a tipped occupation and earn at least $30 in tips per month. If the employee fails to meet these conditions, the employer must pay them full minimum wage.

What are the requirements for employers who want to use tip credit?

Any employer who wants to claim tip credit must inform their employees in advance through an official notice. The FLSA allows verbal notices, but recommends written notices for easier documentation. Notices must include the following information:

• The amount of the cash wage the employee will receive
• The amount of the tip credit the employer will take
• Confirmation that tips belong to the employee
• Assurance that the employer will make up the difference if tips plus wages fail to meet minimum wage
• Any applicable tip pooling rules

What happens if total employee earnings fall short of full minimum wage?

If an employee’s tips fail to raise their total earnings to $7.25 per hour, the employer must make the difference. It is the employer’s responsibility to ensure that all employees make a living wage, even when tipping opportunities are limited.

Does Indiana have an 80/20 rule?

No, Indiana does not have an 80/20 rule. It follows the FLSA, which rolled back the 80/20 rule in 2024. Under current federal law, employers can take a tip credit for incidental, non-tipped tasks as long as those duties don’t take a substantial amount of time. Because the FLSA doesn’t define “substantial,” states may set their own limits. If there are no state-imposed definitions, employers must simply use their best judgment.

Tip pooling in Indiana

Like all states that follow the FLSA, Indiana permits tip pooling, an arrangement where eligible tipped employees contribute a portion of their tips to a shared pool. Employers then redistribute the pooled tips among tipped staff, often based on factors like hours worked, number of shifts, or job function. This helps smooth out tip disparities and gives employees a more consistent opportunity to earn tips, regardless of luck, shift timing, or assigned section.

Indiana tip pooling rules

Indiana requires tip pooling arrangements to adhere to FLSA regulations. These ensure fair pay by defining who can participate, how to distribute shares, and what to do when distributions cannot bring total earnings to full minimum wage.

Who can participate in tip pooling?

	If the employer claims tip credit	If the employer does NOT claim tip credit
Tipped employees	✅	✅
Non-tipped employees	✅	❌
Managers and supervisors	❌	❌

Employers may include non-tipped employees in tip pools if everyone in the staff earns full minimum wage. However, if they claim tip credit, they may not include non-tipped employees in tip pools. This prevents them from diverting tips away from employees who make reduced base wages.

Managers and supervisors are never allowed to participate in tip pools. Their power over the tipped employees creates a conflict of interest and increases the risk of imbalanced tip pool distributions.

What are the notice requirements for tip pooling?

Under FLSA regulations, employers must provide written or verbal notice before implementing tip pooling arrangements. Notices should include the following information:

• Tip pool participants
• Tip pool distribution structure
• Confirmation that no part of the tip pool will go to managers or supervisors

If tip credit applies, notices should also state:

• The reduced base wage
• The amount of tip credit

What if tip pooling can’t bring total earnings up to minimum wage?

If tip credits apply, employers must ensure that tip pool shares bring all employees’ total earnings (base wages plus tips) up to full minimum wage. They are liable to pay the difference if tip pool distributions fall short. Should they fail to compensate for insufficient tips, they may face wage claims, lawsuits, and other civil penalties.

Is mandatory tip pooling allowed?

The FLSA guidelines allow employers to enforce mandatory tip pooling as long as they follow the above regulations. In other words, they must ensure the pool only includes eligible tipped employees and does not benefit managers or supervisors. If they meet these conditions, they may even require tip pooling as a condition of employment.

Legal consequences of violating Indiana tip laws

Tip law violations in Indiana often lead to legal and financial consequences. A couple of examples include taking employee tips, deducting fees from tips, including managers or supervisors in tip pools, and failing to notify employees about tip credit implementation

To avoid potential financial losses, operational shutdowns, and reputational damage, employers must do their due diligence to ensure full compliance with federal and state wage laws.

Wage claims

When an employer misapplies tip credits, withholds or deducts fees from tips, or pays employees below minimum wage, employees may file wage claims under either:

• The Indiana Wage Payment Act (for current employees) or
• The Indiana Wage Claims Act (for former employees)

The Indiana Department of Labor handles administrative wage claims. If they find a claim valid, they may require the employer to provide back wages, liquidated damages, or attorney’s fees.

• Back pay: This means reimbursing employees for the full amount of tips they were legally required to earn under federal and state law. For example, if an employer withheld $2,400 in tips, they must pay it back to the employee.
• Liquidated damages: Employers found in violation of wage laws may need to pay their employees liquidated damages on top of back pay. Liquidated damages are typically equal to the amount of unpaid wages the employer owes. For example, if an employer owes a server $500 in back wages, winning a wage claim may entitle them to an additional $500 in total damages.
• Attorney’s fees: If an employee wage claim succeeds, the employer may also be required to cover the employee’s reasonable attorney’s fees and court costs. These penalties level the playing field for employees and employers, allowing workers to seek legal representation without bearing the full financial burden.

Civil penalties

While Indiana does not impose civil penalties directly for tip law violations, the U.S. Department of Labor (DOL) can impose federal civil penalties for repeated or willful violations. These may include fines upwards of $1,000 per violation if the employer has a history of noncompliance, such as repeatedly including managers in tip pools or failing to notify employees of tip credit use, the risk of incurring civil penalties increases.

Lawsuits

In severe cases, employees may also file lawsuits against employers in state or federal courts. Like wage claims, lawsuits can seek remedies such as back pay, liquidated damages, and attorneys’ fees.

If multiple employees are negatively impacted by improper tip practices, such as unlawful tip pooling or failure to make the difference for insufficient tips, they may file collective or class action lawsuits. Indiana courts regularly enforce both state and federal wage protections, making lawsuits a serious risk for noncompliant employers.

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