To calculate overtime for tipped employees under federal law, multiply the full minimum wage by 1.5 to get the overtime rate, then subtract the tip credit the employer is claiming. The remainder is the cash wage owed for each overtime hour. Using the federal figures, that is $7.25 × 1.5 = $10.88, minus a $5.12 tip credit, leaving $5.76 in cash per overtime hour.1U.S. Department of Labor. Field Operations Handbook – Chapter 32 – Section: 32j18 Tipped employees.
The Regular Rate Is the Full Minimum Wage, Not $2.13
The most common mistake is using $2.13 as the base for the overtime calculation. Federal law lets an employer pay a direct cash wage of $2.13 per hour to a tipped employee, with tips expected to bring the total up to the $7.25 federal minimum wage. The difference, up to $5.12 per hour, is the tip credit.2U.S. Department of Labor. Fact Sheet #15: Tipped Employees Under the FLSA
For overtime, the regular rate must include the tip credit. So the regular rate is at least the full $7.25, not $2.13, and can be higher if the employee earns other compensation or works in a state with a higher minimum wage.1U.S. Department of Labor. Field Operations Handbook – Chapter 32 – Section: 32j18 Tipped employees. Federal overtime is one and one-half times the regular rate for hours worked beyond 40 in a workweek.3Office of the Law Revision Counsel. 29 U.S.C. § 207
The Step-by-Step Calculation
Work the math in three moves.
- Find the regular rate. Under federal rules with no other compensation, that is $7.25 per hour.
- Multiply by 1.5 to get the overtime rate: $7.25 × 1.5 = $10.88 per hour.
- Subtract the tip credit the employer is actually claiming: $10.88 − $5.12 = $5.76 in cash owed per overtime hour.1U.S. Department of Labor. Field Operations Handbook – Chapter 32 – Section: 32j18 Tipped employees.4Legal Information Institute. 29 CFR § 778.110
If the tip credit claimed is smaller than $5.12, subtract that smaller number instead. The overtime rate itself does not change; only the cash portion does.
One check on the whole system: the cash wage plus tips must actually reach the minimum wage each workweek. If tips fall short, the employer covers the gap.2U.S. Department of Labor. Fact Sheet #15: Tipped Employees Under the FLSA
When State Law Changes the Math
Federal rules set a floor. State and local laws can require more, and when they do, the higher figure becomes the regular rate for overtime.5Office of the Law Revision Counsel. 29 U.S.C. § 2181U.S. Department of Labor. Field Operations Handbook – Chapter 32 – Section: 32j18 Tipped employees.
Some states do not allow a tip credit at all. In those states, the employer pays the full state minimum wage in cash regardless of tips, and overtime is simply 1.5 times that state minimum, paid entirely in cash.2U.S. Department of Labor. Fact Sheet #15: Tipped Employees Under the FLSA
Notice and Records Needed to Use the Tip Credit
An employer cannot take the tip credit, and therefore cannot use the subtraction step above, unless the employee was told in advance about the cash wage being paid, the tip credit amount being claimed, the rule that the credit cannot exceed tips actually received, the employee’s right to keep tips outside a valid tip pool, and the fact that the credit applies only when these notices are given.2U.S. Department of Labor. Fact Sheet #15: Tipped Employees Under the FLSA
Records must show the tips reported by the employee for the week or month, the hours worked each day in tipped and non-tipped duties, and the tip credit amount claimed. Paying overtime on the $2.13 cash wage instead of the full regular rate exposes the employer to back-wage and damages claims.2U.S. Department of Labor. Fact Sheet #15: Tipped Employees Under the FLSA