What To Know About New Jersey Tip Laws

New Jersey generally follows federal tip law standards, but the state does forge its own path in some key areas.

The consequences for failing to meet these standards can be stiff: one prominent restaurant owner failed to pay more than $715k in payroll taxes and ended up pleading guilty on two counts, both of which could have landed the restaurateur in jail and came with a five-figure fine.

A modern restaurant management system can help with compliance. But staying compliant starts with an understanding of New Jersey tip laws and what they mean for your restaurant.

What is a “tip” in New Jersey?

A tip is any money (or indicated portion of a credit card charge) a customer leaves beyond the cost of products, services, and tax.

New Jersey law doesn’t add any further specifics to the definition of a tip, so the Department of Labor’s Fair Labor Standards Act (FLSA) framework applies.

A tip has to meet the following requirements:

• It must be completely voluntary.
• The customer must be allowed to choose the amount.
• The amount can’t be set by employer policy (even if it’s subject to negotiation).
• The customer must be in control of who receives the money.

Service charges vs. tips

Mandatory service charges, like the required and automatic 18–20% you see for large parties, might look like tips on the bill, but they are not tips according to the IRS and the DOL (see FLSA Fact Sheet #15).

Any mandatory service charge is the restaurant’s property—not the server’s. If the restaurant management chooses to pay some or all of the service charge out to staff, that money counts as taxable wages, not tipped income.

The main difference is the word “mandatory.” Tips are voluntary, while service charges aren’t.

The basics of New Jersey tip laws

The federal law governing tipped employees is the FLSA, but some states’ tip laws differ from federal ones. This is usually done to provide something more generous or advantageous to the workers in that state, like adjusting the minimum hourly wage to account for the cost of living.

The FLSA also states that whenever a state or local government imposes its own rules, the rules that are most generous to workers take precedence.

Tip pooling

Tip pooling laws can vary by state, but the majority of U.S. states (New Jersey included) don’t have their own separate rules. For these states, the FLSA guidelines apply.

Those guidelines state that tip pooling is legal and employers can require tipped employees to participate in tip pools—as long as the employers follow certain rules.

Employers must disclose tip pools in advance, and they have to be “customary and reasonable.” Employers must allow employees who contribute to the tip pool to keep at least the full minimum wage (which affects how much tip credit restaurants can claim).

Only those employees who regularly receive tips can join a tip pool. In other words, mandatory tip pools shouldn’t include cooks, dishwashers, and other non-tipped staff. Managers, supervisors, and employers can’t receive funds from tip pools either.

It’s easy to see how servers at a high-end restaurant will consistently exceed the minimum wage, even if a slice of their tips goes into a tip pool. The same is true for restaurants with a developed tip strategy.

But what about other employees, like service bartenders or bussers, who might not receive as much money in tips? More value-oriented establishments with lower ticket totals (and thus lower tips per table) could also run into issues if they automatically use the maximum tip credit without carefully calculating each employee’s take-home pay.

Tip deductions

New Jersey employers can’t deduct from employee tips for breakage, cash register shortages, or even credit card fees (which restaurants in some other states can deduct). The only deductions allowed are for a valid tip pool so that employers can pay those tips as wages.

Tip reporting

According to the IRS, tipped employees must report the previous month’s tips by the tenth of each month. Employees should keep a daily tip record and can use IRS form 4070A to keep things simple.

Employers must retain these monthly reports, withhold taxes, and pay the employer share of social security and Medicare taxes based on those reported tips.

Key recent changes in New Jersey tip law for businesses to know

The biggest recent change to New Jersey tip laws happened in August 2020, when the state’s Division of Wage & Hour Compliance released 52 N.J.R. 1562(a), which included several significant changes relevant to restaurants.

Record-keeping requirements

Maintaining accurate records of employees’ tips helps restaurant owners stay compliant with wage and hour laws. They also make it easy to verify that employees receive at least minimum wage between their hourly wage and tips.

Before the August 2020 update, New Jersey last updated its wage and hour laws in 2009. In the earlier update, the state clarified exactly what records employers need to keep regarding tipped employees.

Employers who hire tipped employees need to keep track of the tips received either daily or weekly and must maintain a “complete, true, and accurate record” for six years.

Digital tip payout systems can assist with reporting and tracking and may help you meet New Jersey’s record-keeping requirements.

Increased minimum wage for tipped employees

New Jersey passed a new minimum wage law in 2019 that laid out yearly increases through 2025.

Effective January 1, 2023, employers applying a tip credit must pay tipped employees a minimum of $5.26 per hour. On January 1, 2024, the full minimum wage increases to $15 per hour, but the minimum cash wage for tipped workers stays at $5.26.

This is an increase from the previous rate and is part of New Jersey’s broader efforts to gradually increase the minimum wage for all workers.

Tip credit adjustments

A tip credit is the amount that employers can deduct from their minimum wage obligations—assuming that tips make up the difference. As the state’s minimum wage increases gradually to $15 per hour, the tip credit is also increasing from $7.87 (in 2022) to $9.87 (as of January 1, 2024).

The tip credit may be higher, but employers should remember that they’re still obligated to make sure each tipped employee meets the full minimum wage.

Let’s look at an example. In 2023, Sara, a server at Soda Pop Diner, makes, on average, $14.50 per hour when she combines her cash wages ($5.26 per hour) and tips.

In January 2024, her required cash wage will stay the same, but the state minimum wage will jump to $15 per hour. If her cash wage plus tips still equals $14.50 per hour, her manager will need to pay her an additional $0.50 per hour in wages to meet the minimum wage.

Comparing New Jersey tip laws to surrounding states’ laws

Because New Jersey is close to several other states, many restaurant groups will operate in two or more states. Knowing the variations in tip laws between these states could be the difference between compliance and some hefty fines.

Take Boston Market as a cautionary tale: the chain runs 31 stores in New Jersey and recently was forced to close until it paid back over $600,000 in back wages—and more than $2.5 million in additional fines.

New York

New York’s minimum wage recently changed to $15 per hour, with a $10 cash wage and a $5 tip credit. New York City, Long Island, and Westchester are already at that level, while the rest of the state will reach it in the next few years. Certain municipalities in and around New York City hit $16 per hour in 2024.

New York differs from the federal rule on mandatory service charges, ruling that any such charge is a gratuity and must go to employees.

Aaron Hotfelder, J.D., explains:

“In New York, there is a rebuttable presumption that any charge in addition to charges for food, beverages, lodging, and so on is a gratuity, which must be distributed to employees.”

Pennsylvania

Pennsylvania doesn’t weigh in much on tip laws at the state level.

The only two changes to federal regulations are a slightly lower tip credit ($4.42), bringing the tipped minimum wage to $2.83, and a clarification on who qualifies as a tipped employee. In Pennsylvania, tipped employees are those who regularly earn at least $135 per month in tips.

Otherwise, the state follows the federal standards in all areas.

Delaware

Delaware has a higher minimum wage and a higher tip credit:

• Minimum wage: $11.75
• Tip credit: $9.52
• Tipped minimum wage: $2.23

With such a large tip credit, employers in Delaware must take extra care to make sure that employees reach the full minimum wage.

What are the impacts of tip laws in New Jersey?

Though tip laws apply equally to all tipped employees, they have a larger impact on some roles than others.

In New Jersey, a tipped employee is anyone who regularly receives more than $30 per month in tips. Servers, bartenders, bussers, and valet attendants could all be tipped employees.

However, not every tipped employee automatically receives the tipped minimum wage, and some tipped positions can expect to earn substantially more than others. This is one reason some restaurateurs use a tip pool to address the gap in tips among different types of tipped employees.

Exploring the rights of tipped employees in New Jersey

Tipped employees in New Jersey have a right to their tips. They are the employee’s property, and employers cannot legally retaliate against them for reporting tip violations.

Tips are the property of the employee

Tips belong to employees, not employers. This means that employers cannot keep any portion of their employees’ tips, except for a valid tip pooling arrangement limited to tipped employees.

“Because tips are the property of the ‘tipped employee,’ an employer is prohibited from taking away those tips, unless the tips are being used as (1) a tip credit or (2) part of a valid tip pool.” –Ty Hyderally, Esq.

New Jersey law also states that employers cannot deduct from employee tips for items that break, cash register shortages, or credit card fees.

Minimum wage for tipped employees

The minimum wage is $14.13 in New Jersey, but the tipped minimum wage is $5.26 (provided that the combination of this wage and tips equals the full minimum wage).

The difference between the two rates is called a tip credit. Both minimum wage regulations and tip credits can change regularly, so it’s important to stay up to date on the current rates.

Tax implications to understand

As in other states, tipped employees in New Jersey must pay taxes on all their tips, including both cash tips and credit card tips.

Employers catch a break here—though it can be complicated. They can take a tip credit against their payroll taxes for the amount of tips that their employees earn. In other words, employers don’t have to pay payroll taxes on the portion of an employee’s wages covered by the tip credit.

To calculate tip credits, subtract the state’s tipped minimum wage from the federal or state (or local) minimum wage, whichever is highest.

What happens if New Jersey restaurants don’t follow tip laws?

New Jersey tip laws protect the rights of employees, but what are the consequences for skirting the law?

• Fines: The New Jersey Department of Labor and Workforce Development (NJDOL) can fine restaurants that violate tip laws. The fines can range from $500 to $5,000 per violation.
• Back pay: The NJDOL can also order restaurants to pay back employees any tips that were withheld illegally.
• Punitive damages: In some cases, the NJDOL may also order restaurants to pay punitive damages to employees.
• Criminal charges: In serious cases, restaurant owners and managers could face criminal charges for violating tip laws.

But that’s not all—restaurants that violate tip laws may face reputational damage.

One New Jersey restaurant, Aquarius Seafood, had to pay over $300,000 after violating minimum wage and tip laws. Of that fine, $150,000 was back wages, another $150,000 was damages, and the DOL threw in a $35,000 civil penalty due to the willfulness of the action.

New Jersey law firm Fox Rothschild explains how new guidelines are leading to more and greater penalties:

“The DOL no longer needs to make a determination that such conduct was ‘repeated or willful’ before assessing a $1,100 penalty each time an employer keeps an employee’s tips; it is up to the DOL to assess such penalties as it ‘deems appropriate.’ This penalty is in addition to back pay and liquidated damages that employees can recover.”

Examples of tip violations in New Jersey

• Keeping any portion of employees’ tips, except for a valid tip pooling arrangement: A restaurant deducts a $10 “service fee” from every employee’s daily tips to cover overhead.
• Deducting tips for breakage, cash register shortages, or credit card fees: A restaurant deducts the cost of an item a server accidentally breaks during a shift.
• Retaliating against employees for complaining about tip violations: An employee files a complaint and then is fired or sees their hours drastically reduced.
• Failing to pay tipped employees at least the cash minimum wage: A restaurant whose servers make well over full minimum wage on tips alone neglects to pay that base cash wage. They reason that no one will notice, because the servers earn more than the full minimum wage.
• Failing to make up the difference if an employee’s tips do not equal the full state minimum wage: A bartender pulls in more than $30 in monthly tips but not enough to earn the full minimum wage, and the restaurant doesn’t make up the difference.

Tip violations don’t have to be willful or intentional. Overlooking certain requirements or even miscalculating dollar amounts could result in fines, back-pay restitution, and additional civil penalties.

What to do if a tipped employee’s rights are violated

Tipped employees in New Jersey who believe their rights are being violated have several options. They can call the New Jersey DOL at 609-292-2305 or file a complaint directly online. The DOL also offers an email address, wage.hour@dol.nj.gov, and even has multilingual staff available to help.

Once the complaint is filed, the NJDOL will investigate and take appropriate action against the restaurant if it finds that a violation has occurred. If a civil complaint isn’t sufficient, a private attorney can help file a lawsuit against the restaurant and seek damages for the losses if necessary.

Additional resources

• Full text of New Jersey’s 52 N.J.R. 1562(a) rules (adopted August 2020)
• Two-page summary of tipped worker rights in New Jersey
• New Jersey minimum wage law fact sheet
• Full text of New Jersey’s amendment to its minimum wage law