A U.S. worker whose employer may count tips toward the federal minimum wage is called a tipped employee.
Under the Fair Labor Standards Act, an employer of a qualifying tipped employee may use a tip credit. The employer can pay a direct cash wage below the ordinary federal minimum wage if the worker’s direct wage plus retained tips reaches at least the required minimum for every workweek. The federal direct cash wage permitted under this system is $2.13 per hour.
The arrangement has important conditions. Employers must inform workers about the tip-credit rules, cannot keep employees’ tips, and must make up any shortfall. State law may require a higher direct wage or may prohibit tip credits altogether.
“Tipped employee” is not the same as “independent contractor” or “exempt employee.” The term identifies how tips interact with minimum-wage compliance; it does not automatically remove overtime or other protections.