Pennsylvania Gratuity Laws: Tip Credit, Pooling, and Side Work

Pennsylvania gratuity laws let employers pay tipped workers a cash wage of $2.83 per hour as long as tips bring the total to at least the $7.25 state minimum wage, and they treat tips as the property of the employee who earned them. The state overhauled its rules in 2022, and some protections go further than federal law. The clearest example: employers in Pennsylvania cannot deduct credit card processing fees from tips at all.

Who Counts as a Tipped Employee

Under 34 Pa. Code § 231.101a, an employer can only treat a worker as “tipped” if that worker earns more than $135 in tips per month.¹ The $135 figure is a hard floor. In any month a worker falls below it, the employer owes the full $7.25 hourly minimum for every hour worked that month, with no offset for tips received.

A tip has to be voluntary. The customer chooses the amount and the recipient without the business steering either decision. When the business itself sets the amount (an automatic gratuity on a large party, for example), the payment isn’t a tip and follows the separate service-charge rules below.

The $2.83 Cash Wage and the Tip Credit

The tip credit is the mechanism that lets an employer pay less than $7.25 in cash. Under § 231.101a, the base cash wage can be $2.83 per hour, with the employee’s tips expected to cover the remaining $4.42.¹ If the math doesn’t work out in a given workweek, the employer must make up the shortfall. There is no exception for slow shifts, slow weeks, or seasonal dips.

The reconciliation has to happen each workweek. Averaging across a pay period or a month isn’t allowed, and an employer who assumes tips will always cover the gap without tracking actual earnings week by week is exposed to a back-pay claim.

Notice Before the Tip Credit Applies

Before paying the reduced $2.83 rate, an employer has to tell the employee several things: the cash wage being paid, the amount claimed as a tip credit, that the credit can’t exceed tips actually received, and that the employee keeps all tips except what goes into a valid tip pool. The notice can be verbal or written.² Skip that step and the employer forfeits the tip credit entirely, owing the full $7.25 for every hour worked. Where federal and state rules overlap, the standard more protective to the employee controls.

Overtime Pay

Tipped employees earn overtime at time-and-a-half after 40 hours in a workweek. The rate is calculated from the full $7.25 minimum, not the $2.83 cash wage. That’s $7.25 × 1.5 = $10.88, minus the $4.42 tip credit, for a cash overtime rate of $6.46 per hour past 40.³ If tips don’t bring total compensation to at least $10.88 for each overtime hour, the employer makes up the difference.

Tips Belong to the Employee

All tips belong to the employee who earned them, whether paid in cash, by card, or any other method. Employers cannot dip into tip money for any reason.³ No deductions for broken dishes, register shortages, walkouts, or any other operating cost. A manager pulling cash from a tip jar to cover an expense is violating state law.

Credit Card Processing Fees

This is one place Pennsylvania goes further than federal law. Under 34 Pa. Code § 231.113, employers are completely prohibited from deducting credit card or other payment processing fees from tips.⁴ If a customer leaves $10 on a card and the processor charges the business 3%, the employer absorbs the 30 cents and the employee gets the full $10. The same rule applies before tips flow through a tip pool: no processing fees skimmed off the top.³

Tip Pooling Rules

Mandatory tip pools are legal in Pennsylvania, but who can be in the pool depends on whether the employer takes a tip credit. When the employer pays the reduced $2.83 cash wage, the pool can only include workers in occupations that customarily and regularly earn tips: servers, bartenders, bussers, and similar front-of-house staff.³

When the employer pays every employee at least the full $7.25 minimum wage and does not use the tip credit, the pool can include back-of-house workers such as cooks and dishwashers.³ Some restaurants voluntarily pay the full minimum specifically to enable that kind of sharing.

Owners, managers, and supervisors can never receive money from a tip pool, regardless of which structure is used. A manager may voluntarily contribute tips they personally earned into the pool, but the money moves in only one direction. In, never out.³

The 20% Cap on Side Work

Tipped employees usually do some work that doesn’t directly earn tips: rolling silverware, refilling condiments, wiping down tables between seatings. Pennsylvania caps how much of that non-tip-generating work an employer can pile on while still paying the $2.83 rate. If a tipped employee spends more than 20% of the workweek on duties that don’t directly generate tips, the employer has to pay the full $7.25 for the time beyond that 20% threshold.³

The math is straightforward. A server works 40 hours in a week and spends 10 of them on side work that doesn’t generate tips. That’s 25% of the week, which exceeds the 20% cap by two hours. Those two hours must be paid at $7.25. The Department of Labor and Industry treats tasks like preparing food, making salads, and cleaning kitchens or bathrooms as falling outside a server’s tipped occupation entirely.

Mandatory Service Charges Are Not Tips

An automatic gratuity on a large party, a banquet fee, or any other charge the business sets is not a tip. The line is control: when the business fixes the amount, different rules apply.

Under 34 Pa. Code § 231.114, employers charging administrative fees for banquets, special functions, or package deals must clearly notify customers of the charge, both in the contract and on any menu provided. The notice has to state that the charge does not include a tip for the workers who provided service. Billing statements must list service charges and tips on separate lines.⁵

An employer can distribute service charge money to employees, but anything distributed counts as regular wages, not tips. Those payments carry standard payroll tax withholding and do not count toward the $135 monthly threshold for tipped-employee status.⁵ On the federal side, the IRS classifies mandatory service charges paid out to employees as non-tip wages, so employers must withhold income tax and FICA on those amounts.⁶ For Pennsylvania sales tax, gratuities aren’t taxable when separately stated on the receipt, but all tips are taxable as compensation for state personal income tax.⁷

Records the Employer Has to Keep

Under 34 Pa. Code § 231.34, an employer must maintain detailed payroll records for every tipped worker, including:

A symbol or letter on pay records identifying each employee whose wage is set in part by tips.
The weekly or monthly tip amounts reported by the employee (which the employee can submit on IRS Form 4070).
The per-hour amount the employer claims as a tip credit, with written notice to the employee any time that amount changes.
Hours worked each day in non-tipped duties, with straight-time pay for those hours listed separately.
Hours worked each day in tipped duties, with straight-time earnings for those hours.
For any tip pool, the name and position of each participant and how much each person received.⁸

Splitting tipped from non-tipped hours ties directly to the 20% side-work rule. Without those records, an employer has no way to show it stayed within the cap. Employees have a stake too: the regulation states that a worker who fails to report tip amounts cannot later argue they earned less than what the employer estimated.

Penalties and How to File a Wage Complaint

When an employer breaks Pennsylvania’s gratuity or wage rules, the consequences add up. Under the Wage Payment and Collection Law, an employee whose wages (including improperly withheld tips) go unpaid for 30 days past the regular payday can claim liquidated damages equal to 25% of the total owed, or $500, whichever is greater.⁹ That’s on top of the back wages themselves.

If the employer ignores a state notification of the claim and fails to pay or explain within 10 days, another 10% penalty applies to the amount owed. Criminal penalties are available as well: a violation can be a summary offense punishable by a fine of up to $300, up to 90 days in jail, or both, with each affected employee counted as a separate offense.⁹

Employees have three years from the date wages were due to file a claim.⁹ Complaints can be filed online through the Pennsylvania Department of Labor and Industry, or by mailing or faxing a completed complaint form to the Bureau of Labor Law Compliance in Harrisburg.¹⁰ You don’t need an attorney to file, and the department investigates directly.

1
Legal Information Institute. Pennsylvania Code 34 Pa. Code 231.101a – Minimum Wage Increase
2
U.S. Department of Labor. Fact Sheet 15 – Tipped Employees Under the Fair Labor Standards Act
3
Commonwealth of Pennsylvania. Overtime and Tipped Worker Rules in PA
4
Pennsylvania Code. Pennsylvania Code Chapter 231 – Minimum Wage General Provisions
5
Legal Information Institute. Pennsylvania Code 34 Pa. Code 231.114 – Service Charges
6
Internal Revenue Service. Tips Versus Service Charges – How to Report
7
Pennsylvania Department of Revenue. Are Tips and Gratuities Taxable
8
Legal Information Institute. Pennsylvania Code 34 Pa. Code 231.34 – Tipped Employees
9
Pennsylvania General Assembly. Wage Payment and Collection Law
10
Commonwealth of Pennsylvania. File a Wage Payment and Collection Complaint