When Tips Count as Wages for Commission-Paid Employees
By Al Vreeland - Lehr Middlebrooks Vreeland & Thompson, P.C.
January 13, 2026
As we discussed last June, the Trump Department of Labor has reinstated the practice of providing Opinion Letters to clarify the application of various laws, including the Fair Labor Standards Act, to specific factual scenarios. The Wage and Hour Division started out 2026 by issuing several opinion letters, including an explanation of when tips are considered wages for commission-paid employees and when bonuses must be included in calculating the overtime rate.
The FLSA provides an exemption from its overtime requirement for certain commission-paid employees of a retail or service establishment. To invoke the exemption, the employer must qualify as “retail or service establishment,” more than half of the employee’s compensation must consist of commissions, and the employee’s regular rate must be at least 1.5x the minimum wage.
The Opinion Letter clarified that the minimum wage used to measure the final prong of the exemption is the federal minimum wage ($7.25 per hour), not any higher state or local minimum wage.
The Opinion Letter also addressed when tips can be counted toward the total compensation for purposes of meeting the regular rate threshold. In most circumstances, tips are not counted as they are discretionary with the customer. The Wage and Hour Division explained that tips may be counted if the employer takes advantage of the tip credit, but only up to the difference between the tip credit wage and the minimum wage. Any amount over that difference is excluded from the analysis.
Finally, the letter emphasized that service charges (such as set percentage of the bill) are treated differently than tips, as service charges are not discretionary with the customer. Service charges, therefore, can be counted to satisfy the regular rate requirement.
On the same day, the Wage and Hour Division issued another Opinion Letter reaffirming that bonus payments for meeting predetermined criteria (safety goals, production targets, etc.) must be included in the computation of the regular rate (which is used to determine the overtime rate). WHD reiterated that only truly discretionary bonuses determine after-the-fact, may properly be excluded from the regular rate computation.
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