To say that employment laws, and especially minimum wage laws in the U.S. are not always clear would be an understatement. Perhaps one of the more confusing areas is tipped employees and what they should legally receive.

Whilst tipping may not be commonplace in other countries around the world, it is incredibly common practice in the United States, with the large number of workers making most of their income through tips.

Hospitality workers, including restaurant, bar, cafe, and other service provider employees typically expect to be paid a small hourly wage, which is heavily offset with the addition of tips (gratuities). Most service-industry workers will base most of their take-home pay on tips and rely on them to cover living expenses and other general costs.

So, what is a Tipped Employee?

Firstly, the question that is posed very frequently regarding this topic is, what qualifies a tipped employee? A tipped employee is someone who earns their wages through tips rather than a fixed salary or higher hourly rate. Federal law establishes the rules of what is considered a tipped employee vs. a non-tipped employee.

If an employee receives more than $30 per month in tips, they are considered to be a tipped employee by federal standards. These employees often include workers such as bartenders, servers in restaurants, some hotel workers, and others. The Arizona laws surrounding the definition of a tipped employee follow the federal guidelines.

Tipped Employees and the Arizona Tipped Minimum Wage

To abide by the Arizona minimum wage laws, employers must ensure that when including tips, their employees are being paid at the very least the state minimum wage rate set for Arizona tipped workers, also known as the Arizona tipped minimum wage for employees. If those employees are not making that minimum pay rate, it is then the employer’s responsibility to make up the difference.

There are several different employment law factors that impact how Arizona employers handle their tipped employees. Understanding the minimum wage in Arizona, the federal laws controlling wages, and how pay and wages work for tipped employees is pivotal if you are already running or considering starting a service-related business with tipped employees.

Tipped minimum wage in Arizona

The current minimum wage in Arizona is $12.15 per hour for non-tipped employees. The tipped minimum wage is $9.15 per hour for tipped employees in Arizona. Arizona law requires the Industrial Commission of Arizona to calculate a minimum wage increase each year. The annual calculation is based on the percentage increase in the state’s Consumer Price Index (CPI) previous 12-month period from when the calculation occurs.

The CPI is calculated based on what consumers pay for goods, house price increases, and other significant financial factors. The minimum wage for both tipped and non-tipped employees rises based on the CPI. You can learn more about the Arizona minimum wage, and the factors that go into the annual increases on our minimum wage page.

Fair Labor Standards Act (FLSA) and Tipped Employees

The Federal Fair Labor Standards Act, also known as the FLSA, is a federal law from the U.S. Department of Labor. This law establishes a national minimum wage, defines classifications for employees, and covers other essential standards and requirements for employers.

Federal law requires that employers make tipped employees aware of the cash wage paid (currently, the national direct hourly salary is only $2.13 per hour), let them know about the tip credit, and explain any tip pooling systems at the workplace. Due to Arizona’s minimum wage rate being higher than the federal minimum wage rate, the state laws supersede the federal regulations.

Tipped Employees, Tip Credits, and other Considerations for Arizona Employers

Since the rules for tipped employees are different than non-tipped employees, there are other ways that employers can calculate the minimum amount earned by a tipped employee. One of these ways is through tip credits.

The Arizona tip credit is currently $3.00 per hour – this means that employers can claim a $3.00 hourly credit against the tipped employee’s minimum wage. This credit effectively turns the $12.15 minimum wage into a $9.15 per hour minimum wage that employers must pay to tipped employees no matter how much they earn.

Let’s assume a tipped worker earned less than $3.00 per hour as their tipped wage. In that case, the employer must pay the difference between what they made and the additional $9.15 per hour. This pay is called the minimum cash wage.

A minimum cash wage ensures that tipped employees earn a reasonably consistent wage even if a slow workweek or other downturn occurs where they do not receive sufficient tips. This regular minimum wage rate ensures that servers and others in tipped roles in Arizona that do not make enough with tips can still earn a weekly wage when working full-time of $486.

What Does This Mean for my Business?

If you are planning to start a new business in Arizona due to the abundance of opportunities the state has to offer, or just simply considering Arizona as a location for purchasing a business, you will need to take this information about tipped employees and the state minimum wage into account.

While you may want to speak with an employment attorney or accounting firm for legal and tax advice about your business, understanding the minimum wage laws for tipped employees can help you make an informed decision whether or not to start a business in Arizona that has tipped employees.

In Arizona, much the same as most other U.S. states, tipped jobs are a mainstay of the economy and accessible for those seeking employment given the tourism-heavy nature of the Arizona economy. Today there are just over 10,000 eating and drinking establishments in Arizona, and there are almost 311,000 restaurant and food service jobs in the state.

Most U.S. states and territories require that tipped employees make either the full state minimum wage or make a minimum cash wage higher than the FLSA’s requirements. Regardless of where you locate your business in the U.S., you will most likely need to have a pay rate for tipped employees higher than the federal tipped employee rate.

To learn more about tipped employees, you can check out the Department of Labor’s Website on the minimum wage law for tipped employees.