Quick Hits

• New Jersey Assembly Bill A5433 proposes a five-year phase-out of the tip credit, spanning from 2026 to 2030.
• The bill would mandate employers pay the full state minimum wage to tipped employees before the addition of tips.
• Potential consequences include increased labor expenses for businesses, higher prices for consumers, and uncertain effects on the overall income of tipped workers.

The tip credit is a legal provision allowing employers to pay tipped employees a direct cash wage below the applicable minimum wage rate, and allows employers to use a portion of the tips received by the employee to make up the difference.

This initiative has sparked intense debate about its potential consequences. Advocates claim the bill promotes fairness and worker protection, while opponents fear it will inflate business costs, drive up consumer prices, and trigger job losses within the restaurant and hospitality sectors.

Understanding the Tip Credit

Most employers in New Jersey are governed by two wage and hour laws: the federal Fair Labor Standards Act (FLSA) and the New Jersey Wage and Hour Law (NJWHL). Employers must pay their nonexempt employees the federal ($7.25) or state ($15.49) minimum wage rate, whichever is higher. Currently, both laws also permit employers to count a portion of their employees’ tips toward their minimum wage obligation—a legal mechanism known as the “tip credit.”

Under the FLSA, to utilize the tip credit, employers must first inform employees of their intent to do so. Subsequently, employers must pay “customarily tipped” employees (e.g., waiters and bartenders) a direct cash wage of at least $2.13 per hour. If an employee earns at least $5.12 per hour in tips (the difference between the $2.13 minimum cash wage and the $7.25 minimum wage) over the employee’s shift, the employer can apply these tips as a “credit” against the employee’s minimum wage obligations.

The NJWHL also allows for a tip credit, capped at $9.87 per hour as of 2025. Employers must pay tipped employees a minimum cash wage ($5.62 per hour in 2025), and the total of wages and tips must meet or exceed the state minimum wage.

Employers must ensure that the sum of the direct cash wage and the received tips equals or surpasses the federal (and state) minimum wage for all hours worked in a workweek. If the total falls short, the employer must pay the difference to the employee. This guarantees that the employee receives at least the minimum wage, regardless of the combination of employer-provided cash wages and customer tips. Employers are not required to use the tip credit, but employers commonly use it because it can reduce their costs.

Proposed Changes: Assembly Bill A5433

Assembly Bill A5433 aims to completely eliminate the tip credit under the NJWHL by reducing the amount of tip credit an employer may claim over a five-year period:

• 2026: $7.90 per hour allowable tip credit
• 2027: $5.92 per hour allowable tip credit
• 2028: $3.95 per hour allowable tip credit
• 2029: $1.97 per hour allowable tip credit
• 2030 and beyond: Tip credit eliminated

Crucially, the bill would not prohibit tipping; it would only prevent employers from using a portion of those tips to fulfill their obligation to pay nonexempt employees the minimum wage. By 2030, employers would be required to pay all tipped employees the full state minimum wage before any additional tips.

While the FLSA still permits employers in other states to utilize the tip credit, employers in New Jersey would be obligated to comply with the more stringent requirements of the bill. Thus, eliminating the tip credit under the NJWHL would effectively prohibit New Jersey employers from utilizing the tip credit under the FLSA as well, as taking any tip credit would constitute a violation of New Jersey’s minimum wage law for tipped employees.

Potential Impacts and Concerns

On April 10, 2025, the New Jersey Assembly convened a two-hour hearing to gather public feedback on the bill. The potential elimination of the tip credit elicited strong and contrasting reactions from employees and employers.

The bill’s sponsor, Assemblywoman Verlina Reynolds-Jackson, stated the bill’s intent is to ensure tipped workers “make a decent wage; people should be paid fairly for the work they do.” Proponents argue that eliminating the tip credit guarantees a stable baseline income that is not dependent on the discretionary nature of tipping. This simplified wage structure could also enhance employees’ understanding of their rights and streamline the enforcement of wage laws, thereby reducing wage theft.

Opponents say it would paradoxically reduce earnings for servers, who often make significantly more than minimum wage through tips. Restaurants would bear the increased burden of directly paying all tipped employees the full minimum wage, leading to increased labor costs. Restaurants might be forced to implement mandatory service charges that don’t necessarily benefit their tipped employees, or they could reduce staff hours and eliminate positions altogether. These changes could result in higher menu prices, potentially harming the business, and could also discourage individuals from seeking server positions due to diminished earning potential. Opponents also argue New Jersey’s current system functions effectively, already guaranteeing minimum wage while allowing for substantial earning potential through tips.

Conclusion

The proposed elimination of the tip credit in New Jersey has the potential to dramatically reshape the state’s legal landscape, particularly within the restaurant and hospitality industry. While intended to foster a more equitable wage system, the potential repercussions for employees, businesses, and consumers warrant careful consideration as the legislative process unfolds.