California treats customer tips (or “gratuities”) far differently than federal law. Many states, for example, permit employers to take a federal “tip credit” toward minimum wage – lowering tipped employees’ actual hourly wage well below the federal minimum. Tip credits are illegal in California; all employers must pay the state minimum wage whether an employee receives tips or not.
Employer treatment of tips has become a hot topic for lawyers, who have filed many recent class actions alleging violation of state gratuity laws.
Tips Belong to Employees
State law makes clear that tips belong only to employees, not their employers. California Labor Code section 350 states that a gratuity is “the sole property of the employee or employees for whom it was paid, given or left for." This means that employers may not keep any part of a tip for themselves, even to cover administrative or credit-card fees.
While employers may enforce a tip-pooling arrangement initially approved by employees, any system must be “fair,” reasonable and consistent with industry practice. California does not just prohibit owners from keeping tips or participating in a tip pool. Any employee with supervisory duties is prohibited from participating as well. Managers, supervisors, and low-level shift leaders are prohibited from taking any part of customer gratuities – even a share of the “tip jar” at a coffee counter. These employees need not even be exempt from overtime; Starbucks faced a $100M class action alleging that shift supervisors had taken a share of tips despite a prior suit alleging that the same workers were not sufficiently high-level to be exempt management employees. An appellate court overturned the nine-figure (!) award in that case, but it highlights the risks posed by gratuities.
Recent Changes to Tip Pooling Law
Tip pooling was even more limited under Labor Commissioner opinion letters suggesting that only employees actually engaged in the direct “chain of service” could share tips. This prohibited tip-sharing with chefs, kitchen staff, some bussers, bartenders, and other employees despite their contribution to the overall customer experience. The policy was based on language in an older California tip-pooling case that had suggested the “chain of service” language.
In recent years, state courts have rejected the “chain of service” language, arguing
that it does not appear anywhere within California’s Labor Code. This suggests that one basis for many recent actions – sharing tips with co-employees such as bartenders and runners – will soon be discredited. Federal authorities also moved in this direction but may not continue under the current Administration.
Management Options
Employers should be aware of state-law restrictions on tip pooling and monitor developments in the coming months. General rules can be viewed on the Labor Commissioner’s website at http://www.dir.ca.gov/dlse/faq_tipsandgratutities.htm.
Management should also review the status of "service charges" added to bills, a practice commonly applied to larger parties. Some establishments have turned entirely to service charges and discouraged gratuities on the belief that service charges do not count as “tips” under state law. This has been questioned in at least one recent appellate opinion (see the opinion here) and is likely to evolve based on employee and customer assumptions that charges will be split among servers.
Finally, businesses enforcing a tip-pooling policy should be certain that the system truly complies with applicable law and excludes all managers, assistant managers and shift leads. It makes no sense for employers to accept liability for allocating money that was never theirs in the first place.