Tennessee largely follows federal FLSA rules for everything—minimum wage, tip credits, tip pooling, and overtime calculations. The state does have one specific statute regarding mandatory service charges, but otherwise defers to federal law. Get one of these wrong, and you’re looking at back pay liability, DOL audits, or worse.
This guide breaks down exactly how tip credit works, who can participate in tip pools, the difference between tips and service charges, and the most common compliance mistakes Tennessee restaurant operators make.
How tip laws and minimum wage work in Tennessee
Tennessee largely defers to federal law for tip-related wage and hour rules. Employers follow the federal Fair Labor Standards Act (FLSA) for most matters related to tipped employees, including minimum wage, tip credits, and tip pooling. Tennessee does have one state-specific statute (Tenn. Code Ann. § 50-2-107) requiring certain automatic service charges to belong to employees who served the customer. Under federal rules, you can pay tipped employees a cash wage of $2.13 per hour and claim a tip credit of up to $5.12 per hour, as long as the employee’s total earnings reach at least a minimum wage of $7.25 per hour.
The FLSA defines a “tipped employee” as someone engaged in an occupation in which they customarily and regularly receive more than $30 per month in tips. Servers, bartenders, bussers, and hosts typically fall into this category. If an employee doesn’t consistently hit that $30 threshold, they’re not considered a tipped employee, and you can’t take a tip credit on their wages.
One rule is absolute: tips belong to the employee. Employers can’t keep any portion of them. The only exceptions are valid tip pooling arrangements (which redistribute tips among eligible employees) and deductions for actual credit card processing fees.
What counts as a tip under federal law
A tip is a voluntary payment where the customer decides the amount. That’s the key distinction. When a guest writes in $10 on the tip line, that money belongs to your server, not the restaurant.
The voluntary nature matters. If the customer has no choice in the amount, like an automatic 18% gratuity, it’s not a tip under federal law. It’s a service charge, and the rules are completely different.
- Cash left on the table: Goes directly to the employee
- Credit card tips: Processed through payroll, still employee property
- Tips added through payment apps: Same rules apply
How tip credit works in Tennessee
The tip credit is the amount you can count from an employee’s tips toward your minimum wage obligation. In Tennessee (following federal law), the maximum tip credit is $5.12 per hour. This allows you to pay a $2.13 cash wage instead of the full $7.25.
Requirements for taking tip credit
You can’t just start paying $2.13 and call it a day. The FLSA has specific requirements:
- Tipped employee status: The employee is engaged in an occupation in which they customarily and regularly receive more than $30 per month in tips
- Tip retention: The employee keeps their tips, except for valid tip pool contributions
- Proper notice: You’ve informed the employee about the tip credit before taking it
Miss any of the requirements above, and you may owe back wages at the full minimum wage rate.
Tip credit notice requirements
Before you take a tip credit, you have to tell your employees, in advance, exactly what’s happening. This notice includes the cash wage you’re paying (which must be at least $2.13 per hour), the tip credit amount you’re claiming (up to $5.12 per hour), and that all tips are the employee’s property.
Put this in writing. Include it in your onboarding paperwork. Document that the employee received it. If you can’t prove you gave proper notice, you may lose the ability to claim the tip credit entirely.
When tips fall short of minimum wage
Slow Tuesday lunch shift? Bad weather keeping guests away? Tips can vary wildly, and some workweeks will fall short.
When an employee’s tips plus their cash wage don’t reach $7.25 per hour for the workweek, you make up the difference. Calculate this per workweek, not per shift. Track it carefully because this is where payroll errors happen, and it’s a common target for Department of Labor audits.
Tennessee tip pooling rules
Tip pooling collects tips from multiple employees and redistributes them among the group. It’s legal in Tennessee, and employers can make it mandatory. However, the rules about who can participate are strict.
Who can participate in a tip pool
When you’re taking a tip credit, only employees who “customarily and regularly” receive tips can be in the tip pool. This typically includes servers, bartenders, bussers, food runners, and hosts.
If you don’t take a tip credit, meaning you pay everyone the full $7.25 minimum wage, back-of-house employees like cooks and dishwashers can participate in the pool under federal law. This is a relatively recent change under the 2018 FLSA updates (which officially took effect in 2021).
Who cannot participate in a tip pool
Managers, supervisors, and owners cannot receive distributions from a tip pool. This rule applies even if your GM jumps behind the bar during a Friday night rush and serves drinks for two hours—they can’t take a cut of the tips distributed through the pool.
The Department of Labor defines “manager or supervisor” based on duties, not job titles. If someone has authority to hire, fire, or direct other employees’ work, they’re out of the pool.
Tips vs. service charges and auto-gratuities
This distinction trips up a lot of operators. A tip is voluntary. A service charge is mandatory. They’re treated completely differently under the law.
| Voluntary tips | Mandatory service charges | |
|---|---|---|
| Who owns it | Employee | Employer |
| Customer choice | Customer decides amount | Restaurant sets amount |
| Legal treatment | Protected as employee property | Treated as business revenue |
| Tip credit eligible | Yes | No |
How mandatory service charges work
That automatic 18% gratuity for parties of eight or more? It’s not a tip. It’s a service charge. The customer has no discretion over the amount, so it belongs to the restaurant as revenue.
You can use service charge revenue however you want: pay it out to employees, cover labor costs, or keep it as profit. But it’s not a tip, and you can’t count it toward your tip credit obligation.
Distributing auto-gratuities to employees
If you choose to distribute service charges to employees, that money is wages, not tips. This means it’s subject to payroll taxes, it counts toward the employee’s regular rate of pay for overtime calculations, and it can’t be used to meet your tip credit obligation.
Many restaurants distribute service charges to the employees who worked the event. Just make sure your payroll handles it correctly.
Credit card tips and processing fees
Under federal law, you can deduct credit card processing fees from an employee’s credit card tips. However, you can only deduct the proportional share of the fee from that specific transaction, not a flat fee or an inflated amount. Note that some states prohibit any such deductions, so check your state-specific requirements.
For example, if a guest tips $20 on a credit card and your processing fee is 3%, you can deduct $0.60 from that tip. You can’t deduct $1.00 because it’s “easier math.”
One more rule: the deduction can’t bring the employee’s wages below minimum wage for the workweek. If it would, you absorb the fee.
Paying tipped staff in cash
Paying wages in cash is legal, but it doesn’t change your obligations. You still have to meet minimum wage requirements, maintain accurate records of hours worked and wages paid, withhold payroll taxes, and ensure employees report their tips.
Employees are required to report tips totaling $20 or more per month to their employer for tax purposes. Tips under $20 per month are not reported to the employer, though all tips must still be reported on the employee’s tax return. Paying “under the table” creates significant legal and financial risk for your business, including back taxes, penalties, and potential fraud charges.
How to calculate overtime for tipped employees
Here’s where the math gets tricky. Overtime for tipped employees is calculated based on the full minimum wage, not the $2.13 cash wage.
The formula: (Full Minimum Wage × 1.5) − Tip Credit = Overtime Rate
Using current federal rates: ($7.25 × 1.5) − $5.12 = $5.75 per hour for overtime
A common mistake is calculating overtime as $2.13 × 1.5 = $3.20. That’s wrong, and it’s a violation that can result in significant back pay liability.
Common tip law violations Tennessee employers avoid
The following mistakes show up repeatedly in DOL investigations and employee lawsuits. Knowing them helps you stay compliant.
Skipping tip credit notice
If you don’t provide proper written notice before taking a tip credit, the credit is invalid. You may owe back wages calculated at the full $7.25 minimum wage for every hour worked.
Miscalculating overtime pay
Using the $2.13 rate instead of the full minimum wage to calculate overtime is a clear violation. For employees who regularly work more than 40 hours, this adds up fast.
Including managers or owners in tip pools
Managers, supervisors, and owners cannot receive distributions from tip pools, even if they perform tipped duties. Violations can result in the employer owing the full amount of tips that were improperly distributed.
Failing to make up minimum wage shortfalls
During slow periods, tips may not reach minimum wage. You’re legally required to pay the difference on a workweek basis. Letting an employee earn less than $7.25 per hour for a workweek, even once, is a violation.
Related watch: 7 common restaurant payroll mistakes
Record-keeping requirements for tipped employees
The FLSA requires you to maintain detailed records for tipped employees, particularly when taking a tip credit. Keep payroll records for at least three years and wage-computation records (such as time cards and work schedules) for at least two years:
- Hours worked each day and week
- Cash wages paid
- Tip credit amount claimed
- Tips reported by the employee
If you’re audited and can’t produce records, you’re at a significant disadvantage. The DOL may calculate back wages using the employee’s estimates, which rarely favor the employer.
Simplify tip compliance with the right tools
Managing tip compliance manually with spreadsheets, calculators, and paper records is time-consuming and error-prone, especially when running payroll with tip credit calculations. One miscalculation on overtime, one missed shortfall, and you’re looking at back pay liability.
Tip management software can automate the complex calculations, maintain compliant records, and flag potential issues before they become problems. Tools like 7shifts Tip Pooling handle tip distribution and integrate directly with payroll, taking the compliance headache off your plate.
Spending hours on tip calculations every week? Start your free trial and see how much easier tip compliance can be.
FAQs about Tennessee tip laws
Can employers keep any portion of employee tips in Tennessee?
No. Under the FLSA, tips are the property of the employee. Employers cannot retain any portion, regardless of whether they take a tip credit. The only exceptions are valid tip pooling arrangements (which redistribute tips among eligible employees) and deductions for actual credit card processing fees.
Do Tennessee employers have to pay servers minimum wage if tips fall short?
Yes. If an employee’s tips plus their cash wage don’t equal $7.25 per hour for the workweek, the employer pays the difference. This calculation happens per workweek, not per shift.
Is mandatory tip pooling legal in Tennessee restaurants?
Yes. Employers can require tip pooling among employees who customarily and regularly receive tips. However, managers, supervisors, and owners cannot receive distributions from the pool.
Can back-of-house employees receive tips from a tip pool in Tennessee?
It depends on whether you take a tip credit. If you do, only traditionally tipped front-of-house employees can participate. If you pay all employees the full $7.25 minimum wage and don’t take a tip credit, back-of-house staff can be included under federal law.
Do employees have to report cash tips to their employer in Tennessee?
Yes, but only if they total $20 or more per month. Employees are required to report tips totaling $20 or more per month to their employer for tax purposes. Tips under $20 per month are not reported to the employer, though all tips must still be reported on the employee’s tax return. Unreported tips can create tax liability for both the employee and the business.
Rebecca Hebert, Sales Development Representative
Rebecca Hebert
Sales Development Representative
Rebecca Hebert is a former restaurant industry professional with nearly 20 years of hands-on experience leading teams in fast-paced hospitality environments. Rebecca brings that firsthand knowledge to the tech side of the industry, helping restaurants streamline their operations with purpose-built workforce management solutions. As an active contributor to expansion efforts, she’s passionate about empowering restaurateurs with tools that genuinely support their day-to-day operations.
