Getting tip compliance wrong in Vermont can cost you more than the tips themselves. Between back pay, liquidated damages, and potential fines, a single mistake in how you handle your tip pool or calculate tip credits can turn into thousands of dollars.
Vermont’s tip laws have some quirks that catch operators off guard—like the 50% rule for tipped minimum wage and strict prohibitions on who can participate in tip pools. This guide covers the current rates, tip credit calculations, pooling rules, overtime requirements, and the recordkeeping that keeps you audit-ready.
Vermont minimum wage for tipped employees
In Vermont, restaurant employers can’t keep employee tips under any circumstances. Managers are also prohibited from participating in tip pools. And if you’re taking a tip credit, your tipped employees still have to earn at least the full state minimum wage when you add their base pay and tips together.
Current tipped minimum wage rate
Vermont sets the tipped minimum wage at 50% of the standard minimum wage. Check the Vermont Department of Labor for the most current figures, since rates typically adjust each year.
In 2026, the minimum wage in Vermont is $14.42 per hour, so the minimum tipped minimum wage is $7.21 per hour.
Standard vs tipped minimum wage
| Wage Type | Rate | Who Qualifies |
|---|---|---|
| Standard minimum wage | $14.42 | All non-tipped employees |
| Tipped minimum wage | $7.21 (50% of standard) | Employees who customarily receive tips |
The gap between the two rates is what makes the tip credit possible. But you can only pay the lower rate if your employees actually earn enough in tips to make up the difference.
Minimum wage guarantee when tips fall short
Here’s where Vermont law protects your employees: if tips don’t bring them up to the standard minimum wage, you pay the difference.
- The guarantee: Every tipped employee earns at least the standard minimum wage for all hours worked in a workweek.
- Your responsibility: Track each employee’s tips and hours every workweek. If the math doesn’t work out, you cover the shortfall.
- When it applies: The calculation happens per pay workweek, not per shift. A slow Monday doesn’t automatically trigger make-up pay if Friday’s tips balance things out.
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How tip credit works in Vermont restaurants
A tip credit is the portion of an employee’s tips that you can count toward your minimum wage obligation. Think of it as a legal way to share the cost of wages between you and your customers’ generosity, but only when specific conditions are met.
Maximum tip credit allowed
The maximum tip credit in Vermont equals the difference between the standard minimum wage and the tipped minimum wage. You can’t claim more than this amount, even if your servers are pulling in $30 an hour in tips.
Calculating tip credit each pay period
The math isn’t complicated, but it does require attention. Start with hours worked multiplied by the standard minimum wage to get your total wage obligation. Then subtract hours worked multiplied by the tipped minimum wage, which is the base pay you actually paid. The difference is your tip credit amount, but only if the employee’s reported tips for that workweek equal or exceed the tip credit you’re claiming.
Requirements before taking tip credit
You can’t just start paying the tipped wage and hope for the best. Vermont law requires several things to be in place first:
- Written notice: Give employees a written explanation of your tip credit policy before you start using it. Federal law requires notice before taking a tip credit.
- Tip ownership: Employees keep all their tips. The only exception is a valid tip pooling arrangement.
- Wage guarantee: Combined base wages and tips have to meet or exceed the standard minimum wage.
- Recordkeeping: Maintain accurate records of all tips received and reported.
Skip any of these steps, and you could lose the right to claim the tip credit entirely. That means back pay at the full minimum wage rate.
Vermont tip pooling rules for restaurants
Tip pooling, which involves collecting tips and redistributing them among staff, is legal in Vermont. However, the rules depend on whether you’re taking a tip credit. Get this wrong, and you could be on the hook for every tip that went through that pool.
Employees who can receive pooled tips
When you’re taking a tip credit, only employees who “customarily and regularly” receive tips can participate in the pool. This includes servers and wait staff, bartenders, bussers, food runners, and hosts in some cases. The key phrase is “customarily and regularly.” If a position doesn’t typically receive tips as part of the job, they’re out.
Employees excluded from tip pools
This is where operators get into trouble. When taking a tip credit, owners and partners, managers with hiring or firing authority, supervisors, and back-of-house staff like cooks, dishwashers, and prep cooks cannot touch the tip pool.
Including even one prohibited employee invalidates the entire pool. That means you could owe back every tip that was distributed through it.
Tip pool notification requirements
Before anyone participates in your tip pool, they should know about it in writing. Your notification should include the contribution amount or percentage required. Consider keeping a signed copy in each employee’s file, since this protects you if questions come up later.
Mandatory vs voluntary tip sharing
There’s a difference between a mandatory tip pool, which you control and which follows strict rules, and voluntary tip-outs, where servers choose to share with bussers or bartenders on their own. Both are legal, but only mandatory pools require the formal notification and compliance steps.
Recent changes to Vermont tip laws
Vermont’s wage laws don’t stay static. The standard minimum wage adjusts periodically, and those changes ripple through to tipped employees.
Recent minimum wage adjustments
Vermont’s minimum wage has increased in recent years and continues to adjust. Each time the standard rate goes up, the tipped minimum wage (50% of the standard) goes up with it. This means your tip credit calculations change, too.
Updated tip credit calculations
When rates change, your payroll settings need to change with them. The maximum tip credit amount shifts every time the minimum wage adjusts. Running last year’s numbers with this year’s rates is a compliance mistake waiting to happen.
Tip: Set a calendar reminder to check Vermont’s minimum wage rates before every January. Update your payroll system to stay compliant.
Overtime pay for tipped restaurant workers
Overtime for tipped employees trips up a lot of operators because the calculation isn’t intuitive. The base rate for overtime isn’t the tipped wage. It’s the full minimum wage.
Calculating overtime for tipped staff
Federal law requires time-and-a-half for hours worked over 40 in a workweek. For tipped employees, that calculation starts with the standard minimum wage, not the tipped wage. The overtime rate is 1.5 times the full minimum wage for all hours worked over 40. You can still apply a tip credit to overtime hours, but it’s capped at the same maximum amount as regular hours.
Common overtime mistakes to avoid
A few errors show up in audits more often than you’d think:
- Calculating OT on tipped wage: Wrong. Overtime is always based on the full minimum wage.
- Forgetting the tip credit adjustment: The tip credit applies differently to overtime hours.
- Not tracking hours across locations: If you own multiple restaurants, all hours an employee works across all your locations count toward the 40-hour threshold.
Service charges and tip deductions in Vermont
Tips and service charges look similar on a guest check, but they’re treated completely differently under the law. Confusing them creates compliance problems.
Service charges vs tips under Vermont law
| Tips | Service Charges | |
|---|---|---|
| Customer control | Voluntary | Mandatory |
| Legal ownership | Employee property | Employer property (until distributed) |
| Tip credit | Can apply | Cannot apply |
| Distribution | Goes to employees | Employer decides |
Automatic gratuities, like the 20% you add for parties of eight or more, are typically considered service charges, not tips. That distinction matters for tax purposes and for how you distribute the money.
Credit card processing fees and tips
Can you deduct credit card fees from tips? Federal guidance generally allows it, as long as the deduction doesn’t drop the employee’s wage below minimum wage. However, this is an area where consulting with an employment attorney is worth the cost. The rules can be nuanced, and state interpretations vary.
Recordkeeping for Vermont tip law compliance
Good records protect everyone. They protect your employees from wage theft, and they protect you from claims that you didn’t pay correctly.
Required tip records
Keep documentation of daily or per-shift tip reports from each employee, total tips received and reported, tip credit amounts claimed, tip pool contributions and distributions, and make-up pay calculations when earnings fell short.
Record retention requirements
Vermont and federal law both have retention requirements, and they don’t always match. The safe approach: keep all wage and tip records for at least three years. Some employment attorneys recommend four years to cover potential federal claims.
Mandatory workplace posters
Vermont requires you to display wage and hour posters where employees can see them, typically the break room or back office. You can download current posters from the Vermont Department of Labor website.
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Penalties for Vermont tip law violations
Getting tip laws wrong isn’t just an administrative headache. The financial consequences can be significant.
Back pay and damages
Employees can file claims to recover unpaid wages. Beyond the back pay itself, you could face liquidated damages, potentially doubling what you owe.
State and federal fines
Both the Vermont Department of Labor and the federal Department of Labor can impose penalties. Willful or repeated violations carry higher fines, and a pattern of complaints can trigger broader investigations.
What triggers a Department of Labor investigation
Investigations typically start with employee complaints about unpaid wages or improper tip handling, routine audits, a pattern of complaints in your area or industry, or missing required workplace posters. A history of good-faith compliance helps if you do get audited.
How to simplify tip compliance at your restaurant
Compliance doesn’t have to eat up your week. A few systems in place now save headaches later.
1. Audit your current tip practices
Walk through your tip handling from start to finish. Who’s in your tip pool? How are you notifying employees? Where are your records stored? Do this quarterly and whenever wage laws change.
2. Create a written tip pool policy
Put your tip pool rules in writing: who participates, contribution percentages, and distribution timing. Have every participating employee sign an acknowledgment, and keep copies in their personnel files.
3. Use tip management software to automate tracking
You can track tips manually with spreadsheets and a calculator. But manual tracking is slow, error-prone, and creates documentation gaps. Tip management tools like 7shifts track tips alongside time and attendance, reducing manual calculations and keeping your records audit-ready. Start a free trial to see how tip tracking integrates with scheduling and payroll.
Frequently asked questions about Vermont tip laws
Can Vermont restaurants require customers to tip?
No. Tips are voluntary by definition. You can add mandatory service charges, and many restaurants do for large parties, but service charges are legally different from tips and need to be clearly disclosed on the menu or check.
Are automatic gratuities considered tips or service charges in Vermont?
Automatic gratuities are generally considered service charges, not tips. This affects how they’re taxed and whether they can be used for tip credit calculations (they can’t).
Can restaurant owners in Vermont keep any portion of employee tips?
No. Under both Vermont and federal law, tips belong to the employee. Owners, partners, and managers cannot retain any portion of employee tips.
Do Vermont tip laws apply to food trucks and catering operations?
Yes. Vermont’s tip laws apply to all employers with tipped employees, regardless of service format. The same minimum wage, tip credit, and pooling rules apply whether you’re running a full-service restaurant, a food truck, or a catering company.
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.
