South Carolina Tip Laws for Employers: A Guide on Policies and Fair Labor

 

South Carolina adopts tip laws from the Fair Labor Standards Act (FLSA), including how businesses should handle tips, service charges, and wages. This simplifies compliance for restaurant owners since they don’t need to learn additional state rules beyond federal guidelines. Nonetheless, employers must still follow the rules to the letter to avoid potential legal issues and penalties.

What counts as a tip in South Carolina?

A major characteristic of tips is that they’re voluntarily left by the customer. That means the guest decides how much to leave, and they’re not required to tip at all. Adding a fixed fee to a check, like a mandatory gratuity, isn’t considered a tip and must be treated differently under wage laws.

If a guest leaves $40 in cash on a $200 tab, that’s clearly a voluntary tip. But if your POS auto-adds a 20% gratuity of $40, that’s a different charge altogether. Voluntary tips also include anything left via card or mobile payment apps, as long as the customer sets the amount themselves.

What’s a service charge?

If the restaurant is adding a mandatory fee to the customer’s bill, it’s called a service charge. The guest then becomes required to pay an automatic gratuity for large parties or a banquet fee for private dining. Because the customer doesn’t control the amount, the IRS and the Department of Labor (DOL) consider it business revenue, like money earned from selling food or drinks.

From a tax and payroll perspective, service charges must be treated like regular wages. That means they must go through your payroll system, show up on employee pay stubs, and be subject to income tax, Social Security, and Medicare withholdings.

In South Carolina, service charges are also subject to sales tax. That adds to your restaurant’s tax liability if you include service charges on checks.

Let’s say your restaurant adds a 20% service charge to a $500 private event bill. The $100 must be included as taxable wages if you give it to your staff. It also triggers additional employer-side taxes and increases your total payroll expenses.

If your restaurant uses both, you must label them clearly on receipts and train staff to explain the difference to guests. Mislabeling a service charge as a “gratuity” or “tip” could confuse customers and lead to compliance issues for you.

Also, you can’t count service charges toward the tip credit. They are not considered tip income under FLSA rules, so you can’t use them to reduce your tipped minimum wage obligation to tipped employees.

Who qualifies as a tipped employee?

An employee qualifies as tipped if they regularly receive more than $30 a month in tips. Common tipped roles include servers, bartenders, bussers, barbacks, and hosts. These are positions where team members regularly interact with guests and can earn tips as part of their income.

If an employee doesn’t meet the $30 per month threshold, you can’t claim the tip credit for them, even if they occasionally receive a few dollars in tips here and there.

Managers and supervisors are a special case under tip regulations. They can keep the tips they earn directly, like if a floor manager steps in to serve a table and a guest hands them $10. But they cannot share in the tip pool, where other service employees contribute.

Minimum and tipped wage structure

Businesses in the Palmetto State follow the federal rate set by the FLSA, meaning South Carolina’s minimum wage is $7.25 per hour. Service and hospitality employers can pay a lower cash wage of $2.13 per hour, as long as employees earn enough tips to bring their total hourly pay up to the minimum.

This is called the tip credit. In this case, you can get as much as $5.13 per hour off the minimum wage requirement. If an employee’s tips and cash wage do not reach $7.25 per hour, the employer must make up the difference.

If a server works 30 hours a week, they must earn at least $217.50 total (30 hrs × $7.25). If they only bring in $100 in tips and you paid $63.90 in cash wages (30 hrs × $2.13), their total would be short. You’d need to pay an additional $53.60 out of pocket to stay compliant.

Tip pool and ownership rules

If you let your team pool their tips, you need to follow the restaurant tip pooling laws set by the FLSA. Only employees who “customarily and regularly” receive tips can share in a tip pool, especially if you use the tip credit. You cannot include BOH employees, like cooks, dishwashers, food runners, and prep staff.

The only time you can legally share tips with BOH staff is if you pay all employees the full minimum wage or more, not the reduced tipped wage.

By not using the tip credit, you’re free to create a tip-sharing policy that includes BOH team members. This can be a good option if you want to promote fairness among teams, especially in high-volume or fine dining operations where tip amounts are significant.

Remember, though, that you’ll be taking on higher payroll costs once you skip the tip credit. Nonetheless, you get more flexibility in how tips are shared.

Under both South Carolina law and the FLSA, all tips belong to the employee who earned them. Employers cannot take a cut, skim from the top, or use tips to cover things like walkouts, breakage, or shortages.

If your payroll system deducts fees or processes tips incorrectly, it could expose your business to fines and lawsuits. In 2024, the DOL recovered over $273 million from employers who mishandled tipped wages or broke tip credit rules.

Credit card tips and processing fees

For tips paid via credit cards, employers can deduct processing fees provided that you take only the exact percentage charged by your payment processor. You can’t pad or round up the figures.

Let’s say a guest leaves a $10 tip on a card. If your processing fee is 2.5%, you can legally withhold 25 cents from the employee’s tip and give them $9.75. But even after this deduction, the employee’s total pay (cash wage + tips) still needs to meet or exceed the minimum wage. If it doesn’t, you’re responsible for making up the difference.

To stay compliant and avoid headaches, your restaurant payroll software should clearly show any deductions taken from credit card tips. Make sure you set it to deduct the exact fee per transaction and only from the tips, not the entire bill.

Some restaurants are also now choosing to absorb credit card fees altogether, especially for tips. This way, employees can take home the full tip amount, which boosts morale and helps with retention.

Overtime pay rules for tipped employees

When tipped employees work more than 40 hours in a week, they must be paid overtime according to federal rules. The calculation must be 1.5x the regular hourly rate ($7.25 per hour), not the minimum cash wage ($2.13 per hour).

The tip credit still applies, but it only reduces the amount of cash you owe. Let’s say a server works 45 hours in one week. Here’s what you, as the employer, need to pay in cash wages:

• Regular hours (40 hrs × $2.13) = $85.20
• Overtime hours (5 hrs × $2.13) = $10.65
• Overtime premium (5 hrs × $3.63) = $18.15

Total cash pay owed = $85.20 + $10.65 + $18.15 = $114

This is the minimum amount you must pay in cash wages for that 45-hour workweek. Then, the employee’s tips must still bring their total pay up to at least $326.25 (45 hrs × $7.25 per hour).

If the server’s tips fall short, like if they only made $190 in tips, then you’d owe the difference between their total earnings and the $326.25 minimum. In this example, that would be an additional $22.25 you’d need to pay out.

Required notices and record-keeping

Restaurant owners are required by law to give employees a written notice at the time of hire. This notice must include:

• The agreed wage rate
• The normal hours they are expected to work
• The time and place of payment (for example, every other Friday by direct deposit)
• Any deductions, such as for uniforms or meals

If any of this information changes, you must give employees at least 7 days’ notice, in writing, before the change goes into effect. This rule is outlined in S.C. Code § 41-10-30, and skipping it can lead to fines.

You also have to notify employees before you start using the tip credit. It must outline how much cash wage you’re paying them and the amount of tip credit being claimed. It should also include a reminder that employees keep all their tips, except in a legal tip pool, and the tip pooling policy.

You can choose to give this notice orally or in writing, but written (and signed) documentation is always safer. If an employee later says they weren’t told about the tip credit, you’ll want proof to back you up.

Federal law also requires you to keep detailed records for each tipped employee, especially if you’re using the tip credit. Under 29 CFR § 516.28, you must track:

• That the employee is classified as tipped
• How much the employee reports in tips (daily or weekly)
• How many hours they worked doing tipped tasks
• How many hours they worked doing non-tipped tasks, if any
• The total wage calculations, including both cash pay and tips

These records help prove you’re meeting the minimum wage and following labor laws. If the Department of Labor audits your business, they’ll ask to see this data.

Make sure your payroll system is set up to track these details. If you’re not sure, ask your provider or accountant for help. Inaccuracies in record-keeping are one of the top reasons restaurants fail audits.

Recent labor laws to consider

In 2024, the U.S. Department of Labor reversed a major rule that affected how restaurants apply the tip credit. The old 80/20 rule said that if a tipped employee spent more than 20% of their time on tasks that didn’t earn tips, like rolling silverware or wiping down tables, then you couldn’t take the tip credit for that time. It also added a strict 30-minute limit on those duties.

That rule is now discontinued, and the DOL brought back the original dual jobs regulation. Now, you can apply the tip credit to work that supports a tipped role, as long as it’s related to the tipped job. So, tasks like restocking, setting tables, or making coffee still qualify if they’re part of the server’s normal shift.

However, the rule still says that if an employee performs non-tipped duties in a different job, like doing deep cleaning or working as a dishwasher after their server shift, then you must pay $7.25 per hour or more for that time. You can’t use the tip credit for hours spent working in a separate, non-tipped position.

State legislation

South Carolina doesn’t currently have its own minimum wage law, but two new bills could change that. Both would have a big impact on restaurant payroll.

Senate Bill 3809 (S3809) would raise the state minimum wage to $17 per hour by 2027. Even though the federal tip credit would still apply (up to $5.12 per hour), you’d be required to pay tipped workers at least $11.88 per hour in direct wages. That’s a 557% increase from the current cash wage.

Additionally, House Bill 3226 (H3226) proposes a smaller increase, with a target of $10.10 per hour over a three-year period. Although it’s not as drastic as $17 per hour, it would still raise payroll costs by around 374% for tipped employees.

As of now, neither bill has passed, but both are active and gaining attention in the South Carolina General Assembly. If either one becomes law, it would significantly affect your budget and labor costs. As a restaurant owner, it’s important to monitor these legislative changes closely, so you can pivot when needed.

What SC restaurant owners can do

Now is the time to plan for what’s coming. Even though these wage laws haven’t passed yet, it’s best to be prepared and run payroll forecasts based on potential rate increases.

First, take a look at your restaurant labor costs. Are you optimizing each team member and shift? Check how you can schedule staff efficiently to maximize their time.

Track the days or hours when your restaurant is busiest and slowest. Then, cut extra shifts during slower weekday hours to reduce overtime and wasted labor.

For instance, if you earn only $500 during a Monday lunch shift, but have five servers scheduled, you’re overstaffing. Consider reducing to one or two experienced servers who can handle the workload.

Cross-training staff is another way to stay efficient. When employees can handle multiple roles, like hosting, serving, or food prep, it becomes easier to stay flexible during busy or short-staffed times. However, make sure FOH employees don’t spend too much time on non-tipped tasks.

Menu engineering is another useful strategy. It involves reviewing which dishes are the most popular and profitable, then adjusting the menu to feature more of them. For example, appetizers like nachos or wings typically offer higher margins than main courses.

Redesign your menu to highlight these items and add visual cues that draw the eye. Use design techniques like placing them at the top right corner or using boxes and different fonts to make them stand out.

Consider adding descriptive language that makes dishes sound more appealing. You can also strategically reduce portion sizes or ingredient costs for less popular dishes. Just be careful not to compromise taste or quality. These small, strategic tweaks can help you stay profitable without alienating customers.

Know the law and stay ahead

South Carolina employers may not have separate state rules to follow, but that doesn’t mean they can cut corners when it comes to compliance. The FLSA still requires meticulous calculations, record-keeping, and reporting. Employers who stay informed of the law and potential changes in legislation will be better protected and more likely to succeed.

Labor costs are one of the three biggest challenges affecting restaurant profitability. 7shifts helps you take control by giving you the tools to build efficient schedules and avoid costly compliance mistakes. With built-in wage tracking, tip pool management, and overtime alerts, you can keep payroll on budget without affecting customer service.