Texas Tip Laws: Tip Credit, Pooling, and Service Charges

Texas tip laws come almost entirely from federal law. Texas Labor Code § 62.052 adopts the Fair Labor Standards Act’s tipped-employee provisions almost word for word, so the FLSA sets the floor for tip ownership, the tip credit, and tip pooling across the state.¹ The Texas Workforce Commission enforces wage-and-hour rules and takes complaints, but for day-to-day purposes every Texas employer and worker can assume the federal standards apply.²

Who Counts as a Tipped Employee

A tipped employee under the FLSA is someone who regularly receives more than $30 per month in tips.³ Servers, bartenders, valets, and baristas usually clear that threshold without trouble. A worker who takes in less than $30 a month in tips cannot be treated as a tipped employee, which means the employer must pay the full minimum wage with no tip credit claimed against it.

Who Owns the Tips

Every tip belongs to the employee who earned it. The FLSA is blunt on the point: an employer may not keep tips received by its employees for any purpose, and that bar extends to managers and supervisors whether or not the employer takes a tip credit.⁴ A business owner who pockets even a fraction of a server’s tips violates the law.

The rule covers cash tips, credit card tips, and tips sent through digital payment apps. The employer is a pass-through, not a beneficiary. Using tip money to cover register shortages, walkouts, or broken dishes is illegal.

The $2.13 Cash Wage and the Tip Credit

Texas employers may pay tipped workers a direct cash wage of $2.13 per hour and then claim a tip credit of up to $5.12 per hour to reach the $7.25 federal minimum wage.³ The tip credit can never exceed the tips the worker actually received. If a server has a slow shift and brings in only $3.00 an hour in tips, the employer must make up the remaining $2.12 so total pay reaches $7.25 for every hour on the clock.¹

The Notice an Employer Must Give First

An employer cannot quietly apply the tip credit. Before using it, the employer must tell each tipped employee all of the following:

The direct cash wage being paid, which must be at least $2.13 per hour.
The tip credit amount the employer intends to claim, up to $5.12 per hour.
That the credit cannot exceed the tips the employee actually receives.
That all tips belong to the employee, except for a valid tip pool.
That the tip credit does not apply at all unless the employee has been informed of these items.

Miss any piece of this notice and the employer loses the right to claim the tip credit and owes the full $7.25 per hour for every hour worked.⁵

How Overtime Works

When a tipped employee works more than 40 hours in a workweek, overtime is calculated off the full $7.25 minimum wage, not off the $2.13 cash wage. Multiply $7.25 by 1.5 to get $10.88, then subtract the $5.12 tip credit, and the overtime rate comes to $5.76 per hour. The employer pays that $5.76 for each overtime hour on top of regular wages. Payroll mistakes here are common. Employers who build overtime off the $2.13 base shortchange workers by nearly half the required rate.

Side Work and the Dual Jobs Rule

A server who spends part of a shift rolling silverware, restocking, or cleaning is doing work that doesn’t directly produce tips. The question is whether the employer can keep paying $2.13 per hour for that time.

The Department of Labor’s 80/20/30 rule once set hard limits: non-tipped side work above 20% of total hours, or lasting more than 30 straight minutes, triggered full minimum wage for that time. In 2024 the Fifth Circuit vacated the rule in Restaurant Law Center v. DOL.⁶ Texas sits within the Fifth Circuit, so the 80/20/30 rule no longer applies here.

What remains is the older dual jobs standard. An employer can pay the tipped wage for duties related to the tipped job, such as a server wiping down tables between customers. But if that same server is pulled off the floor to paint a wall or do maintenance, that work is a separate, non-tipped job and the full $7.25 applies. The line is whether the task is part of the tipped occupation or a genuinely different one.

Tip Pooling and Sharing

Mandatory tip pools are legal in Texas under specific conditions. When the employer takes a tip credit, the pool must be limited to workers who customarily and regularly receive tips, like servers, bartenders, and hosts.⁴ Managers, supervisors, and owners with at least a 20% equity stake cannot receive any money from the pool.⁵ That bar holds even when a manager jumps in to run food during a rush.

Including Back-of-House Workers

Cooks, dishwashers, and other kitchen staff can share in a tip pool, but only if the employer pays everyone the full $7.25 minimum wage and gives up the tip credit entirely. If the employer keeps the tip credit, the pool stays restricted to traditionally tipped positions.⁷ Either way, tips must be fully redistributed within the pay period.

Service Charges Are Not Tips

When a restaurant adds an automatic percentage to a bill, such as an 18% charge for large parties, the IRS treats that money as the employer’s revenue, not as a tip. The distinction matters because tips are voluntary and belong to the worker by default, while service charges belong to the business.⁸

The employer is not required to pass any service charge money to staff unless a contract or written policy says so. When the employer does pass it along, it counts as regular wages with the usual income tax, Social Security, and Medicare withholding. Check whether your workplace labels large-party charges as “tips” or “service charges,” because the ownership and tax treatment are different.

Credit Card Processing Fees

When a customer tips on a credit card, the payment processor charges the merchant a transaction fee. The FLSA lets the employer deduct the proportionate share of that fee from the tip. If the processor charges 3%, the employer may reduce a $10 credit card tip by 30 cents. The deduction has to match the actual processing cost, with no markup, and it cannot drop the employee’s effective hourly wages below $7.25. Some states ban this practice outright. Texas does not.

If an Employer Breaks the Rules

Tip violations carry real penalties under the FLSA. An employer who illegally keeps employee tips or misapplies the tip credit is liable for the full amount of tips unlawfully taken plus the tip credit claimed, and then owes an equal amount again as liquidated damages, roughly doubling the recovery. The court also awards attorney’s fees to the employee.⁹ The Department of Labor can add civil penalties of up to $1,100 per violation.

In Texas, workers can file a wage claim with the Texas Workforce Commission, but the window is tight: claims should be filed within 180 days of the date the wages were due. Filing is available online, by fax, or by mail. A worker can also file a federal lawsuit or a complaint with the U.S. Department of Labor’s Wage and Hour Division, which operates under its own statute of limitations through the Portal-to-Portal Act. Keeping a daily tip log makes any of those routes much easier to pursue.

1
State of Texas. Texas Labor Code 62.052 – Tipped Employees
2
Texas Workforce Commission. Fair Labor Standards Act – What It Does and Does Not Do
3
U.S. Department of Labor. Minimum Wages for Tipped Employees
4
Office of the Law Revision Counsel. 29 USC 203 – Definitions
5
U.S. Department of Labor. Fact Sheet 15 – Tipped Employees Under the Fair Labor Standards Act
6
U.S. Court of Appeals for the Fifth Circuit. Restaurant Law Center v. Department of Labor
7
U.S. Department of Labor. Tip Regulations Under the Fair Labor Standards Act
8
Internal Revenue Service. Tips Versus Service Charges – How to Report
9
Office of the Law Revision Counsel. 29 USC 216 – Penalties