If you run a restaurant in the United States, you already know that Federal wage laws aren’t just complicated, they’re unforgiving. Overtime pay for tipped employees is one of the most misunderstood areas, and even well-meaning mistakes can trigger large fines and lawsuits. Between tip pooling rules, manager eligibility, and how overtime is calculated, there’s little room for error and a lot at stake if you get it wrong.
The Rules That Catch People Off Guard
- You can’t use the tipped wage to calculate overtime.
- Managers, even if they occasionally serve meals, can’t share tips on days they perform supervisory duties.
- Back-of-house staff are excluded from tip pools unless every employee is paid full minimum wage.
- A vague “service charge” can be legally treated as a tip, with all the same restrictions.
To see how this plays out in practice, consider these cases from Georgia and Texas:
Real Consequences from Real Restaurants
In Georgia, a restaurant failed to pay overtime correctly and allowed managers to take a share of the tip pool. As a result, they had to pay over $158,000 in back wages and penalties. The violation wasn’t malicious, it was a misunderstanding of the rules. But the consequences were real.
In Texas, a hospitality group operating several bars and lounges was cited for misclassifying tipped workers as independent contractors. This allowed the employer to avoid paying minimum wage, overtime, and payroll taxes, thereby violating multiple provisions of federal labor law. The Department of Labor determined that the workers were actually employees based on their job duties and lack of control over their schedules. The employer was required to reclassify the staff, pay back wages, and cover penalties. This wasn’t a case of bad intent, it was a misreading of classification rules and it came with a steep cost.
These examples show how even a small misunderstanding can lead to serious consequences. You might not be trying to cut corners, but the law cares about accuracy, not intent.
How Overtime Really Works for Tipped Employees
If someone works more than 40 hours in a week, you owe them time-and-a-half, but not based on the tipped wage. It’s calculated from the full minimum wage, and that’s where many restaurants go wrong.
Rates vary state to state, but the calculation method stays the same. The following example uses the State of Massachusetts’ 2025 rates:
- Full minimum wage: $15.00/hour
- Tipped wage: $6.75/hour
- Tip credit: $8.25/hour
Correct overtime calculation:
$15 × 1.5 = $22.50
$22.50 – $8.25 = $14.25/hour overtime rate
Incorrect (and illegal) calculation:
$6.75 × 1.5 = $10.13/hour → That’s an underpayment of $4.12/hour, and it adds up fast.
Avoiding the Most Common Mistakes
Even if you know the rules, here are the slip-ups that trip restaurants up most often:
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Calculating overtime from the tipped wage instead of the full minimum wage.
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Mixing ineligible staff into tip pools (like managers or back-of-house employees).
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Labeling charges incorrectly; if it looks like a tip, the law may treat it like one.
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Sloppy recordkeeping; unclear hours or service charges can sink you in an audit.
Think of this as your quick compliance checklist. Avoid these mistakes, and you’ll be one step ahead. But if you’re worried about making one of them, there’s an easier way forward.
You don’t need to memorize wage laws or do the math yourself every week. With the right payroll system, overtime and tip calculations are handled automatically, and you get to stay focused on running your business instead of getting buried in spreadsheets.
Let Commonwealth Payroll & HR Handle It for You
At Commonwealth Payroll & HR, we make sure your payroll is set up to handle tipped employees the right way—accurately, legally, and with zero guesswork. You’ll get updates as laws change, and support from your Customer Service and Support Specialist who knows your business. We’ve helped restaurants of every size stay compliant and confident.
It’s important to remember, however, that it is the responsibility of the employer to enter accurate data. Our systems and team are here to support you, but the accuracy of your payroll starts with the information you provide. Contact us today, and let’s make sure your team gets paid right and your business stays protected.
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