Service charges are wages
A compulsory service charge is not a tip under the FLSA. Amounts distributed from service charges are compensation and generally enter the regular rate used to calculate overtime.
Tips and overtime pay
Tipped overtime starts from the full minimum wage
When an employer claims the federal tip credit, overtime for a covered nonexempt tipped employee is based on the full federal minimum wage, not only the lower cash wage. The employer cannot enlarge the tip credit for overtime hours.
Federal figures are a floor. Many states require a higher cash wage, limit the tip credit, or prohibit it. Use the more protective applicable state or local rule before calculating an actual paycheck.
The federal components are separate
The FLSA currently allows a qualifying employer to pay at least $2.13 in direct cash wages and claim up to $5.12 in tip credit toward the $7.25 federal minimum wage. Before using that credit, the employer must give the required notice, allow the employee to retain tips except for a valid pool, and make up any workweek shortfall. Managers and supervisors cannot keep employee tips.
45 hours at the federal floor
The regular rate is $7.25, not $2.13. Straight-time value for 45 hours is $326.25, and the extra half-time premium for five overtime hours is $18.13 after rounding. The maximum $5.12 tip credit across 45 hours is $230.40, leaving at least $113.98 in direct wages under the DOL example, provided the worker actually received enough tips and every tip-credit condition was met.
Short tips require a top-up
Cash wages plus tips must reach the applicable minimum wage in each workweek. The employer must pay the difference on the regular payday when customer tips are insufficient.
Common calculation error
Multiplying $2.13 by 1.5 produces the wrong federal overtime basis. Another error is taking deductions for shortages or breakage that push direct wages below the required minimum.
Official sources checked 2026-09-03: DOL Fact Sheet #15, DOL state tipped minimum wage table, and 29 CFR Part 531.