Texas Restaurant Tip Laws: Understanding Tip Credits, Taxes, Service Charges and More

 

Texas tip laws are less complex than most other large states, but no less important to get right: Just ask one Texas barbecue restaurant, which the Department of Labor fined $867,000, after they improperly withheld tips from employees and paid them out to managers instead.

How do Texas restaurateurs need to approach wages, tipping, and taxes to avoid becoming another cautionary tale?

Minimum wage and tipping credits

The federal minimum wage rate is currently $7.25 per hour, and Texas doesn’t have a separate state minimum wage. They follow the federal guidelines laid out in the Fair Labor Standards Act (FLSA) for both minimum wage and tip credits.

This means employers can take a tip credit of up to $5.12 per hour, creating a tipped minimum wage of just $2.13 per hour—as long as the employee makes at least $5.12 per hour in tips.

In other words, employees must still earn at least the federal minimum wage from combined tips and wages. If an employee makes less than $5.12 per hour in tips, the employer must pay the difference (taking a smaller tip credit).

However, you need to be aware of one significant clarification: the difference between tipped and non-tipped duties.

Employers can claim the tip credit only on hours worked on tip-producing duties and directly supporting work (cleaning, rolling napkins, prepping salads, etc.). But that side work can only last for 30 minutes at a time and can’t add up to more than 20% of hours per work week.

If a tipped employee exceeds these thresholds for non-tipped work, the employer has to pay them the full minimum wage for that time.

One restaurant chain in Dallas allegedly failed to make this distinction properly and ended up in court as a result.

A former employee at Gloria’s Latin Cuisine is suing the restaurant, claiming that the company failed to pay her and other employees minimum wage over the course of three years.

In the lawsuit, the employee states that they were given non-tipped assignments, but were paid the $2.13 per hour tipped minimum wage. According to their claims, this was their approach for all employees—even though the Texas minimum wage for non-tipped work is $7.25 per hour.

Tip pooling and sharing in Texas

Tip pooling (also called tip sharing or tipping out) is the practice of collecting some portion of earned tips into a pool, then redistributing those tips according to defined percentages.

It’s a way to ensure equitable distribution and to account for the reality that patrons don’t tip all employees equally.

According to Texas law and FLSA guidelines, tip pooling is legal, and employers can require tipped employees to pool tips. But the pooled tips can only go to tipped employees (so they can’t be shared with cooks, for example), and the percentage taken must be reasonable.

Tip pooling in Texas has one important stipulation: a valid tip pool can only include tips that exceed the tip credit. In other words, a server keeps the first $5.12 worth of tips each hour. Anything over that can go into the pool.

All states base their tip pooling laws on the FLSA, but restaurant tip pooling laws do vary by state. For more details, check out our full guide on tip pooling laws.

Who can legally receive tips?

The FLSA defines tipped employees as those “engaged in an occupation in which they customarily and regularly receive more than $30 a month in tips.”

In the restaurant industry, wait staff, bartenders, hosts, and counter staff who serve customers are usually considered tipped employees. Cooks and dishwashers aren’t—though it’s certainly not illegal for them to receive tips directly from patrons.

Management is a different story. Managers, owners, franchisees, and anyone else considered an agent of the employer can’t legally be included in the tip pool.

Management can only receive tips directly when they’re the sole server for a table or when a patron explicitly indicates that a tip is for management.

Tax implications

Texas has no state income tax, so tipped workers and their employers are under no additional obligations beyond what is already standard with the IRS.

The IRS recommends that tipped employees:

• Keep a record of daily tips
• Report those tips to the employer
• Report all tips when filing income taxes

Employers should keep timely and up-to-date records as well, so they can:

• Pay employee tips promptly and accurately
• Calculate and pay appropriate Social Security and Medicare taxes
• Be prepared for quarterly and annual filings

Recent changes have upped the ante for restaurants underreporting tips—even though restaurants rely on their employees to truthfully report those tips. Consultant John Nessel elaborates on one tip for verifying employees’ reports:

“If you have a POS system that tracks server sales by employee, then it is easy (though time-consuming) to see if your servers are accurately reporting their tips. Your POS should report each server’s total credit card sales and total charged tips on credit cards, and the server’s total sales (cash and credit card)… Combine the total credit card tips and the estimated cash tips for the period in question and compare this total to the tips reported by the employee.”

A note on mandatory service charges

Federal law is clear: mandatory service charges are not legally considered tips. Some restaurants regularly apply these to the bills of larger parties (think “parties of six or more…” statements at the bottom of bills and menus).

Even though many consumers assume that this money is the gratuity, it belongs to the restaurant/employer, not the employee. Employers may pay out some or all of this money to tipped staff, but if they do, they must classify it as wages, not tips.

For a service charge to be classified as a tip, several conditions must be met:

• The payment must be entirely voluntary.
• The customer must have the unrestricted right to determine the amount.
• The amount cannot be set by employer policy or subject to negotiation with the employer.
• The customer must have the right to decide who receives the payment.

Any charge labeled as mandatory or that has a pre-set amount (even if that amount is technically negotiable) cannot be considered a tip.

Are tipped employees still entitled to overtime pay?

Yes, all employees, including tipped employees, are entitled to overtime pay. Employers must pay time and a half for any time worked above 40 hours in a week.

Employers should make this calculation using the full minimum wage: $7.25 x 1.5 = $10.88 per hour. Then they can deduct the tip credit of $5.12 from that figure, landing at an hourly wage of $5.76 for any hours above 40.

Tips are not used in this calculation, though employees must still reach full minimum wage (and time-and-a-half for overtime hours) for the employer to take the full tip credit.

Employment lawyer Rob Wiley explains where employers often go wrong here:

“If an employer claims a tip credit and pays its tipped employees $2.13 per hour, they may mistakenly calculate the employee’s overtime rate by multiplying $2.31 by 1.5 to get $3.20 per hour. This is wrong. What the employer is actually required to do is use the standard minimum wage of $7.25 to get the overtime rate and then deduct the tip credit.”

Additional resources

Use these additional resources to learn more about labor and tipping laws in Texas:

• FLSA Fact Sheet #15: Tipped Employees
• FLSA Fact Sheet #15a: Dual Jobs and Tip Credits
• US Department of Labor Wage and Hour Division: Definitions and examples of tips and dual jobs
• Title 29 B V A Part 531.54 of the Code of Federal Regulations: tip pooling