How does federal minimum wage law affect tipped employees?

• A. Tips can be counted toward minimum wage
• B. Tips must be paid as cash wages only
• C. Tips are not counted toward wage at all
• D. Employers may count tips toward minimum wage and provide a base wage below the standard

Answer: (D)

Federal minimum wage rules for tipped employees rely on a tip credit. Employers are allowed to count a portion of an employee’s tips toward the minimum wage, letting the employer pay a lower base cash wage as long as the total earnings (base wage plus tips) meet or exceed the federal minimum wage. For example, with the federal minimum wage at $7.25, a tipped employee can be paid as little as $2.13 in cash per hour if tips make up the remaining $5.12 per hour to reach $7.25. If tips fall short, the employer must make up the difference. This arrangement is why the base wage can be below the standard minimum, while the total compensation must still meet federal requirements. Remember, states can have different rules, but at the federal level this is the mechanism of tipping credits.