FLSA compliance for restaurants in 2026: Tips, overtime, & the tip credit explained

FLSA compliance for restaurants means getting wages, overtime, tip credits, tip pools, and recordkeeping rights. 

But the challenge is that the rules feel like they’re constantly changing. Between 2024 and 2026, three major FLSA-related changes were vacated, rescinded, or rewritten, leaving many operators working from outdated assumptions.

This guide explains the current state of FLSA compliance in 2026. You’ll learn how to avoid the calculations most operators get wrong and see how to build compliance into your payroll and scheduling system (instead of relying on every manager to remember every rule).

An FLSA restaurant compliance checklist: The current  FLSA rules 

Restaurant labor compliance depends on how you apply tip credit, calculate overtime, and handle tipped work across locations. 

The table below summarizes the biggest federal changes restaurant operators need to understand in 2026.

The rules around tipped work have changed, but the core wage calculations have not. 

The federal minimum wage remains $7.25 per hour, and employers using the federal tip credit can still pay a cash wage of $2.13 per hour, provided employees earn enough tips to reach the full minimum wage.

Side note: Federal and State regulations change constantly. While this information is correct at the time of publishing, it might not be by the time you read it. Make sure you’re using the most accurate information by reviewing official government sites. 

The tip credit: How the math actually works

Federal tip credit rules let you count part of an employee's tips toward your minimum wage obligation, and make up the difference if tips fall short. At federal level, $2.13 cash wage plus a maximum $5.12 tip credit equals the $7.25 federal minimum wage.

The basic calculation is simple:

$2.13 cash wage + $5.12 maximum tip credit = $7.25 federal minimum wage

The complication is everything around that calculation. The credit only works if you meet the tip credit notice requirements, track tips correctly, and make up any shortfall every pay period.

To use the federal tip credit, restaurants must:

• Pay FLSA tipped employees at least the $2.13 federal cash wage

• Ensure the tip credit does not exceed $5.12 per hour or the tips the employee actually receives

• Give employees notice before applying the tip credit

• Make up the difference if an employee’s cash wages and tips do not reach the full minimum wage

The notice requirement is where a lot of restaurants slip up because it often gets lost during employee onboarding, payroll changes, or when employees move between locations. Without proper notice, the tip credit may not apply.

The Department of Labor (DOL) allows this notice to be given verbally or in writing. In practice, written notice is safer. If you can’t show that notice was provided, you may not be able to claim the tip credit! So make sure you keep a record that employees received and acknowledged it.

The notice must let employees know: 

• The cash wage they will receive

• The amount of the tip credit you are claiming

• That the credit cannot exceed the tips they actually receive

• That employees keep all tips, unless they participate in a valid tip pool

• That the tip credit only applies after they receive this information

Now, how does the tip credit work if you don’t make enough tips to cover staff wages? The short answer is that you need to pay the difference. 

Say that a server works 30 hours in a week and earns $120 in tips:

• Cash wages: $2.13 × 30 hours = $63.90

• Tips received: $120

• Total earned: $183.90

The federal minimum wage requirement is:

$7.25 × 30 hours = $217.50

The employee is short by:

$217.50 - $183.90 = $33.60

In this situation, you must pay the $33.60 difference with that paycheck. 

Side note: You can’t use a stronger week of tips to offset a weaker one.

Also, watch out for service charges. A mandatory service charge isn’t the same as a tip!

For example, an automatic 18% charge added to a large party’s bill belongs to the restaurant. If you distribute any of that money to employees, it counts as wages, not tips. 

Doing this can affect overtime calculations because those payments may need to be included in the employee’s regular rate of pay.

The 80/20/30 rule is gone. What governs side work now?

Federally there is no longer a 20% or 30-continuous-minute cap on tip-supporting side work. The Fifth Circuit vacated that rule, DOL restored the original dual jobs regulation, and the older standard applies.

The new federal standard looks at whether the work is part of the employee’s tipped occupation or a separate job. 

So the question is, is this work part of the employee’s tipped occupation or is it a separate job?

Example: A server who spends time setting tables, preparing coffee, cleaning glasses, or completing other tasks connected to service is generally still performing duties within their tipped role. In other words, the tip credit applies.

But a server who regularly performs roles that fall under a separate occupation (like maintenance work or janitorial duties unrelated to serving customers) is different. The tip credit shouldn’t cover those hours. 

Side note: The exact tip credit rules can still vary by state, and some states continue to apply their own 80/20-style requirements.

And another side note! The regulation may also change again. The DOL included tipped employee regulations on its 2026 regulatory agenda, but no new federal rule has been finalized at the time of writing. For deeper legal analysis of the litigation history, employment law firms like Ogletree provide detailed breakdowns. 

Tip pooling laws: Who’s in and who’s out?

Employers, managers, and supervisors can’t keep any portion of employee tips, either directly or through a tip pool. This rule also applies when a manager works a service shift. 

The only exception is if a manager receives a tip for service they personally and solely provided, such as covering a table.

A person’s job title doesn’t decide whether they’re a manager. The DOL looks at their actual responsibilities, including whether they manage employees, direct the work of others, or influence hiring and firing decisions.

The rules for tip pools depend on whether you take a tip credit:

• If you claim a tip credit: Your tip pool can only include employees who customarily and regularly receive tips, such as servers, bartenders, and bussers. You can't include back-of-house employees like cooks or dishwashers.

• If you don't claim a tip credit: You can include back-of-house employees in the tip pool, as long as every employee is paid at least the full minimum wage in direct cash wages. Managers and supervisors still can't participate.

For multi-site operators, the biggest risk is inconsistency between locations. A supervisor added to one pool or a different rule applied by one GM can create a wage issue across the business.

Overtime under the FLSA: Thresholds and the tipped-employee calculation

Restaurants make two common overtime mistakes. They misclassify managers as exempt, or they calculate tipped overtime using the $2.13 cash wage instead of the full minimum wage. The second mistake can quietly cost thousands of dollars over time.

Who's exempt from overtime?

As of 2026, the federal salary threshold for executive, administrative, and professional (EAP) exemptions is $684 per week ($35,568 per year). The threshold for highly compensated employees is $107,432 per year.

But salary alone doesn't make someone exempt. They must also meet the relevant duties test. 

An assistant manager who spends most of their shift serving customers, running food, or expediting orders may still qualify for overtime, even if they're paid a salary.

Side note: Some states also have higher salary thresholds or stricter exemption rules than federal law (California, New York, Washington, and Alaska are a few examples). Always apply whichever standard is more protective of the employee.

How to calculate overtime for tipped employees

When you take a tip credit, you calculate overtime by using the full minimum wage, not the $2.13 cash wage. That's one of the most common payroll mistakes restaurants make.

Here's what that looks like for a server who works 45 hours in a week at the federal minimum wage.

1. Find the regular rate. Use the full federal minimum wage: $7.25 per hour.

2. Calculate overtime. 1.5 × $7.25 = $10.88 per overtime hour.

3. Apply the tip credit. Subtract the maximum federal tip credit of $5.12, leaving $5.76 in cash wages for each overtime hour.

4. Calculate weekly cash pay. 40 hours × $2.13 = $85.20. 5 overtime hours × $5.76 = $28.80. Total cash wages = $114.00, plus all tips retained.

5. Check the total. Cash wages and tips together must equal at least $344.40 for the week. If they don't, you must make up the difference.

The mistake that catches restaurants out

An incorrect payroll process often calculates overtime from the $2.13 cash wage instead of the full minimum wage.

That calculation looks like this:

1.5 × $2.13 = $3.20 per overtime hour

Instead of paying $5.76 in cash wages for each overtime hour, the employee receives $3.20.

That doesn't sound like much, but it adds up quickly. For one server working five overtime hours, it's a shortfall of $12.80 in a single week. 

Across 20 tipped employees averaging five overtime hours each week, that's $13,312 a year before liquidated damages, attorney fees, or state penalties.

Side note: If your state minimum wage is higher than the federal minimum wage, follow the same calculation using your state's minimum wage and maximum tip credit instead.

“No tax on tips”: What the 2025 law changes for your payroll, and what it doesn't

Despite the name, the “no tax on tips” payroll rules for restaurants don’t change how you process payroll. Tips are still subject to payroll taxes and withholding. The biggest change for employers is new W-2 reporting from 2026 wages.

The One Big Beautiful Bill Act introduced a federal income tax deduction of up to $25,000 in qualified tips for tax years 2025 to 2028. The deduction begins to phase out for employees with a modified adjusted gross income above $150,000 for single filers and $300,000 for joint filers.

Employees claim the deduction when they file their tax return. It's not applied through payroll, and employees must have a valid Social Security number to qualify.

Here’s a breakdown of what you need to know: 

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Don't forget about service charges! 

Mandatory service charges and automatic gratuities aren't considered qualified tips. They're treated as wages, so your POS and payroll systems need to distinguish them from voluntary customer tips.

It's also worth preparing your teams for the change. A lot of employees hear “no tax on tips” and expect higher take-home pay. In reality, they'll claim the deduction when they file their tax return, not through their regular paycheck. Having that conversation early can prevent confusion later.

Federal tipped minimum wage vs state: Where does state law override it? 

The FLSA sets the minimum standard, but not the only standard. If state law offers employees greater protections, you'll need to follow these rules instead (which is especially important if you operate across multiple states). 

There are four state-level differences every restaurant operator should know about.

1. Some states don't allow a tip credit

Seven states require restaurants to pay tipped employees the full state minimum wage in direct cash wages, with tips paid on top:

• Alaska
• California
• Minnesota
• Montana
• Nevada
• Oregon
• Washington

If you're expanding from a tip credit state into one of these markets, your labor model changes immediately.

2. Some states have a higher tipped cash wage

Many states allow a tip credit but require employers to pay a higher cash wage than the federal minimum of $2.13 per hour.

The overtime calculation stays the same. You'll just use your state's minimum wage and maximum tip credit instead of the federal figures.

3. Some states have stricter side work rules

Although the federal 80/20/30 rule no longer applies, some states continue to enforce their own rules around tipped employee side work.

If you operate across multiple states, don't assume the federal standard applies everywhere.

4. Predictive scheduling is a separate compliance requirement

Some states and cities also have predictive scheduling, or Fair Workweek, laws. These require employers to give advance notice of schedules and may require premium pay when schedules change at short notice.

Side note: Rather than publishing a 50-state comparison that quickly becomes outdated, we recommend using the Department of Labor's state resources as a starting point. You should also confirm the rules with your payroll provider or employment counsel before making policy changes.

The five FLSA failure modes multi-site restaurants face

Most FLSA problems come from small process changes that happen quietly across locations. A new GM, a payroll setting, or a local workaround can create a wage issue that multiplies across your entire group.

Here are the five issues multi-site restaurants should be aware of to prevent them from happening. 

1. Side work drift

A location starts asking servers to handle more opening prep, deep cleaning, or non-service tasks to save labor.

Over time, those duties can move beyond a tipped employee’s normal role. Depending on the state and the type of work, the tip credit may no longer apply for those hours.

2. A supervisor in the tip pool

A shift lead regularly works the floor and starts receiving a share of pooled tips because it feels fair locally.

But can managers take tips from a tip pool? The short answer is that managers and supervisors can't participate in employee tip pools, even when they work a service shift*. One location making its own exception can create a group-wide issue.

*The only exception is a tip given directly by a customer for service the manager personally provided, such as serving their own table.

3. Overtime tracked by location instead of employer

An employee works 28 hours at one restaurant and 28 hours at another. Each location sees fewer than 40 hours, but the employee worked 56 hours for the same employer.

Those hours must be combined, meaning the employee is owed overtime for the additional 16 hours. As restaurant groups grow, this becomes easier to miss.

4. Missing or outdated tip credit notices

A tip credit notice given at onboarding may no longer be accurate after a transfer, promotion, or wage change.

Every location needs access to current employee notices and records that show when they were provided.

5. Treating service charges as tips

An automatic 18% service charge is added to a bill, distributed like a tip, and excluded from overtime calculations.

That creates two problems: overtime may be understated for employees who receive those payments, and payroll reporting may be incorrect.

Recommended reading: How to maintain operational consistency as you scale to multiple sites. 

How multi-site operators make FLSA compliance systematic

The most reliable way to reduce FLSA risk is to build compliance into the systems that create your labor schedules and manage payroll, rather than relying on GMs to remember every rule.

You can fix many compliance gaps with basic controls:

• Keep signed tip credit notices in one central location

• Set clear tip pool rules across every site

• Audit payroll settings to confirm overtime is calculated correctly

• Track employees who work across multiple locations

The challenge is that these controls depend on people remembering to run them. This is where connected systems make a difference. 

Where Nory comes into the picture: How agentic AI helps 

Multi-site restaurants reduce FLSA risk when payroll, scheduling, and labor decisions run from the same operational data. Nory helps operators build those connections by forecasting demand, planning labor, and checking payroll inputs across every location, reducing the manual gaps where compliance issues often start.

But what actually is Nory?

Nory is an agentic AI restaurant operating system built for multi-site operators. Our AI Assistants work together to help restaurants control labor costs while creating more consistent processes across locations:

• The Forecasting Assistant predicts demand at a site and daypart level, helping you plan the right labor needs before the shift starts. With around 97% forecast accuracy, teams can avoid relying on last week's schedule as a starting point.

• The Scheduling Assistant builds labor schedules around forecasted demand, helping you balance coverage, labor targets, and employee availability. This makes overtime easier to spot before it happens, rather than discovering excess hours after payroll closes.

• The Payroll Assistant connects scheduled hours, actual hours worked, and employee roles, helping you identify payroll inconsistencies before they become costly corrections. It reduces manual checks and gives you a clearer view of labor across every location.

• The Compliance Assistant helps you monitor operational rules and flag potential issues, giving an additional layer of visibility as regulations and requirements change.

Restaurants using Nory also see around a 10 to 20% labor cost reduction in the first eight weeks. Take a look at these real results from Nory costumers: 

• Roasting Plant reduced payroll processing time from two days to one hour while reducing labor costs by 18%. 

• Passyunk Avenue reduced labor costs by 26%. 

It’s quicker when everything is on Nory now — no need for separate Excel sheets. Plus, there’s far less chance of human error.
Inga Kazlauskaite, General Group Manager, Roasting Plant Coffee

For multi-site restaurant groups, FLSA compliance is part of a bigger prime cost challenge. When labor planning, scheduling, and payroll work from the same data, operators can protect margins while reducing the risk of costly wage and hour mistakes.

Side note: Nory isn’t a replacement for compliance policies or legal guidance. Our software helps multi-site operators put those processes into practice by connecting scheduling, payroll, and labor data in one place.

FAQs about FLSA compliance for restaurants

What is the federal tipped minimum wage in 2026?

The federal tipped cash wage is $2.13 per hour, with a maximum tip credit of $5.12 against the $7.25 federal minimum wage. If tips don't bring an employee up to $7.25 for the workweek, you must pay the difference. Seven states don't allow a tip credit at all, and many states set higher requirements.

Is the 80/20 rule still in effect in 2026? 

Not at the federal level. The DOL's 80/20 rule for tipped employees was vacated in 2024, and the older dual jobs standard now applies. The focus is on whether the work is part of an employee's tipped occupation or a separate job, not how many minutes they spend on side work. Some states still have their own rules.

Can a manager or supervisor take a share of the tip pool?

No. Managers and supervisors can't receive a share of employee tips through a tip pool, even if they work a service shift. The only exception is when a manager receives a tip directly from a customer for service they personally and solely provided, such as covering their own table.

How do you calculate overtime for a tipped employee?

Calculate overtime using the full minimum wage, not the tipped cash wage. At the federal minimum, 1.5 × $7.25 = $10.88. After applying the $5.12 tip credit, the cash overtime rate is $5.76 per hour. Using $2.13 instead is a common payroll mistake.

Does “no tax on tips” mean restaurants stop withholding taxes on tips?

No. The 2025 law created an employee income tax deduction of up to $25,000 for qualified tips from 2025 to 2028. Tips are still subject to Social Security and Medicare taxes, and employer payroll obligations haven't changed. From 2026 wages, employers also have new W-2 reporting requirements for qualified tips.

What salary makes a restaurant manager exempt from overtime in 2026?

The FLSA overtime salary threshold in 2026 for restaurant managers is $684 per week ($35,568 per year), but salary alone isn't enough. Managers must also meet the relevant duties test. Some states have higher thresholds or stricter exemption rules, so operators need to check the rules where they operate.

Build FLSA compliance into your restaurant operations

FLSA compliance comes down to getting the basics right: accurate tip credits, correct overtime calculations, consistent tip pool rules, and reliable payroll records. For multi-site operators, the biggest risk is relying on manual processes that vary by location.

Nory helps restaurant groups connect forecasting, scheduling, payroll, and compliance workflows in one system, making it easier to spot issues before they become costly wage claims.

Book a chat with the team to improve your payroll accuracy and build more consistent operations across every site.

Disclosure, sources, and disclaimer

Nory provides restaurant operations software (including scheduling and payroll), so we have a commercial interest in the role technology plays in compliance. We’ve kept that perspective limited to one section and have been clear where legal advice is needed. 

We built this guide using primary sources available at the time of writing, including DOL guidance, Federal Register publications, IRS guidance, and court decisions in Restaurant Law Center v. U.S. Department of Labor. Where rules are still developing or sources differ, we’ve called that out rather than oversimplifying. 

This article provides general information about federal wage and hour law, but it isn’t legal, tax, or accounting advice. It doesn’t replace guidance from employment counsel. FLSA requirements can vary by location and depend on your specific operations, so review your tip credit notices, tip pools, overtime processes, and employee classifications with qualified advisors.

Here are some sources and further reading:

• U.S. Department of Labor, Field Assistance Bulletin and FLSA tipped employee guidance: U.S. Department of Labor: Tipped Employees Under the FLSA.

• Fifth Circuit opinion in Restaurant Law Center v. U.S. Department of Labor: Fifth Circuit Court of Appeals Opinion, No. 23-50562

• U.S. Department of Labor restaurant overtime rules updates: U.S. Department of Labor: Overtime Rulemaking

• IRS guidance on the “no tax on tips” provision: IRS guidance on qualified tips under the One Big Beautiful Bill Act

• Federal Register final regulations on qualified tips: Federal Register: Qualified Tips Regulations