Many employees of the service industry receive tips from customers on top of their regular wages. In many cases, these employees actually earn more in tips than they do in wages.

Tips are treated differently than regular wages under U.S. and Territorial labor laws, even though they are considered a form of compensation. It’s important for businesses to understand the rules associated with tips and wages in service industries to make sure they are in full compliance.

Basic information and rules on tipping

The most basic rule employers must remember is that all tips belong to employees and you are not allowed to require employees to give any portion of their tips to the business, unless there is a valid tip pooling arrangement in place. Even then, the tips are only to be divided amongst other employees—and none should go to the employer.

In the U.S. Virgin Islands, employers may even make tip pooling a regular arrangement. When that occurs, all employees affected by the pool must put in a portion of the tips they make to be divided amongst all workers. However, there are restrictions on the amount employers can ask employees to put into the pool, and employees must at least be able to hold on to the full minimum wage.

The money from a tip pool may only get split amongst employees who would otherwise receive tips as part of their regular job duties. For example, waiters or bartenders in a tip pool would not have to share their tips with cooks or dishwashers—but they could if they so desired.

Employers can pay any employees receiving tips less than the minimum wage, so long as those employees are able to make enough money in tips to make up the difference. This lower rate of pay is what’s known as a “tip credit.”

How do mandatory service charges affect tips?

In some situations, there are mandatory service charges applied to bills. This most often occurs when there are large tables, private parties or catered events at restaurants. Federal labor laws dictate that these service charges are not to be considered tips. To that end, employers may keep any money designated as service charges. In some cases, there may be some confusion that arises among guests, who might mistake the mandatory service charge to be a tip.

Some states and territories have rules in place to ensure employers are making it quite clear to guests what the service charge covers. In general, however, it’s good for employee morale to make sure you explain to customers that a service charge is not a tip, and that it’s merely a convenience fee for having a large party or private event.

Understanding how to pay tipped employees can be complicated, just like many other employment legal issues. If you have further questions, consult an experienced labor law attorney to discuss your company’s situation.


Ravinder S. Nagi is Assistant Managing Attorney and Chair of the Labor and Employment Law Practice at BoltNagi, a widely respected and well-established employment and labor law firm serving businesses and organizations throughout the U.S. Virgin Islands.