California Labor Laws are designed to provide the highest level of protection for workers. For employees in the service industry, this means that they are legally entitled to keep all tips voluntarily left for them.1 Employers are not allowed to collect any part of these gratuities.2
There are, however, some important caveats to this rule. This article takes a closer look at those caveats and explains California law as it relates to employee tips and gratuities.
- 1 Governing Law
- 2 What Is Considered a Tip or Gratuity?
- 3 Important Rules for Tips in California
- 4 The Employer’s Record-Keeping Duties
- 5 Legal Consequences for Violations
- 6 The Employee’s Remedies for Violations
In the context of tips and gratuities, California employees are protected by two main sets of laws:
- The federal Fair Labor Standards Act, and
- California’s Labor Code. Specifically, Labor Code sections 350 through 356.
In some cases, there may also be laws governing tips and gratuities on the local level, adopted by counties or cities.3
Although the laws regulating tips and gratuities may overlap with each other, an employer must follow the law most favorable to the employee.4
The California Labor Code was enacted to protect employees and promote worker-positive public policy.5 Therefore, California law will often provide more protections for workers than is required under federal law.
What Is Considered a Tip or Gratuity?
Under the California Labor Code, a gratuity is defined as money left for an employee by a customer above the actual amount due for the underlying good or service.6 Generally, a tip is left by a patron as a reward for good service and the amount is not regulated by the employer.
In general, tips and gratuities have four defining characteristics:
- They are given voluntarily by the customer,
- The customer has an unrestricted right to select the amount they wish to give,
- The payment is not negotiable or dictated by employer policy, and
- The customer has the right to determine who receives the tip or gratuity.7
Tips Are Not a “Wage”
California’s treatment of tips and gratuities as non-wage payments is significant because, when California law requires an employer to pay overtime, the usual overtime rate is calculated based on the employee’s regular rate of pay.10
Because tips and gratuities are not a wage—and instead are left voluntarily at the discretion of the customer—they are not included when employers calculate the employee’s regular rate of pay for overtime purposes.
Mandatory Service Charges Are Not Tips
A mandatory service charge, which is added automatically to a customer’s bill, does not constitute a tip under the law.11 In general, these service charges legally belong to the employer, who then may distribute to employees or keep it as he or she sees fit.12
It is worth noting, however, that some local ordinances in California require service charges to be paid in full to the employee that performed the services.13
Mandatory service charges are treated differently than tips and gratuities for several reasons. First, service charges have different tax consequences and presumptions even if they are later given to the employees.14 Second, service charges can be counted towards minimum wage payments and the calculation of overtime wages.
It is possible for an employee to receive money from a service charge, as distributed by an employer, and to receive normal tips as well. This situation is referred to as “double tipping” and it is legal in California.15
Important Rules for Tips in California
When Tips Must Be Paid
In general, cash tips are payable to the employee immediately when they are received, without interference from the employer.16
If, however, the customer pays the tip by a credit card, the tip must be paid to the employee, in full, on the next regular payday after the credit card payment was authorized.17
Credit Card Charges Are the Employer’s Responsibility
In some states, employers are permitted to subtract a proportionate amount of the tip to cover the employee’s share of the credit card processing fee. But under California Law, an employer cannot deduct any credit card processing fees from a tip left to an employee through a patron’s credit card.18
Therefore, the full tip left by the customer must be given to the employee and the employer must pay the full cost of the processing fee.
Tip Pooling Is Generally Legal
Tip pooling is the practice of gathering some or all of the tips earned by several employees, and then splitting them up in previously-agreed percentages. In California, employer-mandated tip pooling is generally considered legal, as long as certain conditions are met.19 Those conditions are as follows:
- The people participating in the pool are employees;20
- The tips included in the pool were given to employees;21 and
- The participants in the tip pool do not include people who don’t customarily and regularly receive tips or gratuities, like dishwashers, cooks, or janitors;22
- The employer, the owner, the managers, and the supervisors do not share in the tip pool.23
A restaurant requires all servers to contribute 10% of their tips to a restaurant’s floor manager. The floor manager has the power to hire and fire servers, without needing additional authorization from the restaurant’s owners.
This arrangement would be unlawful because the floor manager serves as an “agent” of the employer. The floor manager may not share in the server’s tips.24
Although this test generally excludes supervisors from sharing in the tip pool, at least one court has held that supervisors can join in the tip pool if they spend large portions of their time doing the same work as regular employees and the tips were likely left, in part, for them.25
Additionally, although there is no definitive law on this issue, there is a strong argument that the tip pooling arrangement must involve a fair and reasonable distribution of the tips.26 A fair and reasonable distribution of tips will usually be found where an employer has an impartial system for deciding how much is paid to each employee.
In general, tip pools should include employees who customarily receive tips and are in the chain of service—such as servers, bussers, and bartenders. But tip pooling arrangements are not necessarily limited to those who provide services directly to the customer.27
Minimum Wage: No Tip Credits Allowed
In California, employees are entitled to be paid at least the minimum wage. In 2018, the minimum wage in California is $10.50 per hour for employees that work for employers with 25 or fewer employees, and $11.00 per hour for larger employers.28
In some states, and under federal law, employers are allowed to credit tips toward the employee’s minimum wage.29 This is called a “tip credit,” and it essentially allows employers to pay their workers less than the minimum wage if, when the employee’s tips are considered, the employee’s income meets minimum wage requirements.30
California law, which provides stricter protections for the employee, expressly forbids tip credits.31 Thus, tip credits are illegal in California, and any employment contract allowing tip credits is illegal.32
The Employer’s Record-Keeping Duties
Every employer is required to keep accurate records of all tips received, either directly or indirectly.33 This means that employers must keep records of tips paid by credit card or checks, and accurately distribute them to employees.
These records must be made available for inspection by California’s Labor Commissioner’s Office.34 This requirement can help employees prove wrongdoing on the part of their employer in the event of a dispute.
Legal Consequences for Violations
Any employer who violates the Tip and Gratuity laws of California is guilty of a misdemeanor and may be fined up to $1,000, imprisoned for 60 days, or both.35
These penalties are in addition to any money the employer may owe to the employee.
The Employee’s Remedies for Violations
As mentioned above, Labor Code section 351 provides that tips and gratuities are the sole property of the employee or employees to whom they are given. At first glance, this would seem to permit employees to file a lawsuit against their employer’s for violating their tip rights.
In 2010, however, the California Supreme Court held that employee’s do not have a private cause of action to recover tips from their employer.36 This means that employees cannot file a lawsuit against their employers to recover misappropriated tips or gratuities. Only California’s Department of Industrial Relations has authority to enforce this portion of the Labor Code.37
Nevertheless, employees still have some options to recover money from their employer’s. Several of those options are as follows:
- Labor Commissioner Complaint. An employee can file a wage claim with California’s Division of Labor Standards Enforcement (the Labor Commissioner’s Office) so that an investigation can take place, and damages can be pursued by the Labor Commissioner.38
- Conversion Lawsuit. “Conversion” is a type of lawsuit that alleges someone interfered with another person’s property rights.39 If an employee’s tips are wrongfully withheld, they can file a lawsuit alleging conversion.40
- Unfair Business Practices Lawsuit. California’s Unfair Competition Law (the “UCL”) prohibits unlawful, unfair, or fraudulent business practices.41 Any person who has lost money as a result of those acts can file a lawsuit under the UCL.42 California courts have held that this permits employees to file lawsuits against employers who violate the Labor Code.43
- PAGA Claim. California’s Labor Code authorizes employees to file lawsuits against their employers to recover civil penalties. This statute is called the Private Attorneys General Act, and lawsuits brought under it are commonly referred to as “PAGA claims.” Importantly, several steps need to be followed before an employee is authorized to bring a PAGA claim.44
Retaliation is Prohibited
Employees who do not receive their tips or gratuities as required by law have a right to bring the issue to their employer’s attention and request full compliance with their tip and gratuity rights. Employers are legally prohibited from retaliating against employees who request a minimum wage.45
Employees are also protected from retaliation if they file a complaint with a governmental agency or a lawsuit in court alleging a violation of their tip rights.46 This means that an employee cannot be punished, fired, or treated unfairly for exercising these rights.
Deadline to File
In many cases, it is important to act fast because claims based on minimum wage violations can expire. This expiration period is called a statute of limitations. The applicable statute of limitations will depend on the type of claim the employee pursues.
- Contract Claims. If the employee is alleging a violation of an oral agreement with their employer, the statute of limitations is two years from the date of the violation.47 If the employee is alleging a violation of an written agreement with their employer, the statute of limitations is four years from the date of the violation.48
- Conversion Claims. A lawsuit for conversion (mentioned above) must be filed within three years of the violation.49
- Unfair Business Practices Claims. If an employee is alleging a violation of California’s Unfair Competition Law (also mentioned above), the statute of limitations is four years from the date of the violation.50
- PAGA Claims. If the employee is pursuing a claim under the Private Attorneys General Act (a “PAGA claim”), it must be filed within one year of the violation.51
Labor Code, § 351 [“No employer or agent shall collect, take, or receive any gratuity or a part thereof that is paid, given to, or left for an employee by a patron, or deduct any amount from wages due an employee on account of a gratuity, or require an employee to credit the amount, or any part thereof, of a gratuity against and as a part of the wages due the employee from the employer. Every gratuity is hereby declared to be the sole property of the employee or employees to whom it was paid, given, or left for. An employer that permits patrons to pay gratuities by credit card shall pay the employees the full amount of the gratuity that the patron indicated on the credit card slip, without any deductions for any credit card payment processing fees or costs that may be charged to the employer by the credit card company. Payment of gratuities made by patrons using credit cards shall be made to the employees not later than the next regular payday following the date the patron authorized the credit card payment.”].Footnote 1
Henning v. Industrial Welfare Com. (1988) 46 Cal.3d 1262, 1272.Footnote 2
Cal. Const. art. XI, § 7 [“A county or city may make and enforce within its limits all local, police, sanitary, and other ordinances and regulations not in conflict with general laws.”].Footnote 3
29 U.S.C. § 218; Aguilar v. Ass’n for Retarded Citizens (1991) 234 Cal.App.3d 21, 34 [“[F]ederal law does not control unless it is more beneficial to employees than the state law.”].Footnote 4
See, e.g., Labor Code, § 356; Industrial Welfare Com. v. Superior Court of Kern County (1980) 27 Cal.3d 690, 702 [“[I]n light of the remedial nature of the legislative enactments authorizing the regulation of wages, hours and working conditions for the protection and benefit of employees, the statutory provisions are to be liberally construed with an eye to promoting such protection.”].Footnote 5
Labor Code, § 350, subd. (e) [“‘Gratuity’ includes any tip, gratuity, money, or part thereof that has been paid or given to or left for an employee by a patron of a business over and above the actual amount due the business for services rendered or for goods, food, drink, or articles sold or served to the patron.”].Footnote 6
Searle v. Wyndham Int’l (2002) 102 Cal.App.4th 1327, 1335 [emphasizing the customer’s discretion as a defining characteristic of a gratuity]; Internal Revenue Bulletin, June 25, 2012 (Rev. Rul. 2012-18), available here.Footnote 7
Industrial Welfare Com. v. Superior Court of Kern County (1980) 27 Cal.3d 690, 731 [describing tips as a type of “non-wage benefit”].Footnote 8
See 26 U.S.C. § 3121(a)(12), (q).Footnote 9
Labor Code, § 510, subd. (a).Footnote 10
Searle v. Wyndham Int’l (2002) 102 Cal.App.4th 1327, 1335 [“Because the service charge is mandatory and because the hotel is free to do with the charge it as it pleases, the service charge is simply not a gratuity which is subject to the discretion of the individual patron.”].Footnote 11
This means that even if an employer distributes a portion of these funds to the employee, the employer must withhold Social Security and Medicare taxes, cannot claim a credit against tax obligations, and must include them as part of the employee’s hourly wages.Footnote 12
See, e.g., Santa Monica Municipal Code, § 4.62.040 [“An Employer shall distribute all Service Charges in their entirety to the Employee(s) who performed services for the customers from whom the Service Charges are collected. No part of these amounts may be paid to Employees whose primary role is supervisory or managerial. No Employer or agent thereof shall deduct any amount from wages or other compensation required by this Chapter due an Employee on account of a Service Charge, or require an Employee to credit the amount of a Service Charge, in whole or in part, against and as a part of the wages or other compensation required by this Chapter due the Employee.”], available here.Footnote 13
California, in 2015, amended their regulations to be consistent with the I.R.S.; there is a new presumption regarding whether a gratuity is taxed in a certain manner: Mandatory payments are which are later designated as tips are included in taxable gross receipts. True gratuities, which are voluntarily paid, are not included in taxable gross receipts as long as the employer maintains proper records. (See California State Board of Equalization, Publication 115: Tips, Gratuities, and Service Charges (May 2015) [“For transactions beginning on and after January 1, 2015, when a retailer’s records reflect amounts required to be reported to the IRS as non-tip wages, the amounts are deemed to be mandatory and includable in taxable gross receipts.”], available here.Footnote 14
Searle v. Wyndham Int’l (2002) 102 Cal.App.4th 1327, 1334 [“The hotel is free to retain for itself the large premium, as well as the service charge, or to remit all or some of the revenue to its employees.”].Footnote 15
Labor Code, § 351 [“No employer or agent shall collect, take, or receive any gratuity or a part thereof that is paid, given to, or left for an employee by a patron, or deduct any amount from wages due an employee on account of a gratuity, or require an employee to credit the amount, or any part thereof, of a gratuity against and as a part of the wages due the employee from the employer.”].Footnote 16
Labor Code, § 351 [“Payment of gratuities made by patrons using credit cards shall be made to the employees not later than the next regular payday following the date the patron authorized the credit card payment.”].Footnote 17
Labor Code, § 351 [“An employer that permits patrons to pay gratuities by credit card shall pay the employees the full amount of the gratuity that the patron indicated on the credit card slip, without any deductions for any credit card payment processing fees or costs that may be charged to the employer by the credit card company.”].Footnote 18
Leighton v. Old Heidelberg, Ltd. (1990) 219 Cal.App.3d 1062, 1068 [“We reject plaintiff’s contention that employer-mandated tip pooling constitutes a prohibited ‘taking’ by the employer within the meaning of section 351.”].Footnote 19
Budrow v. Dave & Buster’s of California, Inc. (2009) 171 Cal.App.4th 875, 879 [“There are only two conditions created by section 351: the person must be an employee and the tip must have been ‘paid, given or left for’ the employee.”].Footnote 20
Budrow v. Dave & Buster’s of California, Inc. (2009) 171 Cal.App.4th 875, 879.Footnote 21
29 U.S.C. 203(m) [“[T]his subsection shall not be construed to prohibit the pooling of tips among employees who customarily and regularly receive tips.”]; Oregon Rest. & Lodging Ass’n v. Perez (9th Cir. 2016) 661 F.3d 433 [“Under section 203(m), a tip pool is valid if it is comprised exclusively of employees who are ‘customarily and regularly’ tipped.”]; 76 Fed. Reg. 18832 (April 5, 2011). At the time of this writing, this rule is pending consideration by the United States Supreme Court in Nat’l Restaurant Assn. v. Dept. of Labor (Jan. 24, 2017) Case No. 13-35765.Footnote 22
See Labor Code, §§ 350, subds. (a), (d) [defining employer and agent to include “every person other than the employer having the authority to hire or discharge any employee or supervise, direct, or control the acts of employees”], 351 [prohibiting employers and agents from receiving any gratuity paid to an employee by a patron].Footnote 23
Jameson v. Five Feet Restaurant, Inc. (2003) 107 Cal.App.4th 138.Footnote 24
See Chau v. Starbucks Corp. (2009) 174 Cal.App.4th 688, 692 [tip pooling permissible where shift supervisors who spend 90% of their time doing the same work as baristas, and the store had a general tip jar for the entire crew].Footnote 25
Etheridge v. Reins Internat. California, Inc. (2009) 172 Cal.App.4th 908, 926 [“While [the employee] has not alleged a factual basis for a cause of action for an unfair or inequitable tip pool, it is my view that such a cause of action may be asserted in a proper case. That a tip pool, in order to be valid under Labor Code section 351, must be fair and equitable is, in my view, mandated by the rationale of Leighton. When that court concluded that the tips belong to all employees providing service to a patron, it stated that the tip was ‘to be equitably distributed between them.’ (Leighton v. Old Heidelberg, Ltd. (1990) 219 Cal.App.3d 1062, 1070.)”].)Footnote 26
Etheridge v. Reins Internat. California, Inc. (2009) 172 Cal.App.4th 908, 923 [“These policy reasons extend to mandatory tip pools which include employees who do not provide direct table service, but participate in the chain of service. Dishwashers and other kitchen staff are encouraged to give their best possible service as they know they will participate in the financial rewards if the customers are pleased with their work, even though the customers do not personally see them doing it. And a mandatory tip pool makes certain that these employees receive their fair share when the patrons are pleased with their service, but have no way to tip them directly.”].Footnote 27
See Labor Code § 1182.12, subd. (b).Footnote 28
See 29 U.S.C. § 203(m); 29 C.F.R. § 531.50.Footnote 29
See, e.g., Kilgore v. Outback Steakhouse (6th Cir. 1998) 160 F.3d 294, 298 [“The tip credit allows employers to include in its calculation of a ‘tipped employee’s’ wage the amount that an employee receives in tips up to fifty percent of the minimum wage . . . .”].Footnote 30
Labor Code, § 351; People v. Los Angeles Palm, Inc. (1981) 121 Cal.App.3d 25, 35 [“Improperly crediting tips against a minimum wage skews employee benefits such as vacation or sick time; inaccurately reflects income for federal and state income tax purposes; avoids payment of additional wages for overtime and split shifts. That the employees of appellant received better than average tips, according to appellant, which are partially reported, does not alter the above factors. Such a practice clearly violates California law and constitutes an unfair business practice within the meaning of the statute.”].Footnote 31
Labor Code, § 356 [“The Legislature expressly declares that the purpose of this article is to prevent fraud upon the public in connection with the practice of tipping and declares that this article is passed for a public reason and cannot be contravened by a private agreement.”]; see also Civil Code, §§ 1668 [“All contracts which have for their object, directly or indirectly, to exempt any one from responsibility for his own fraud, or willful injury to the person or property of another, or violation of law, whether willful or negligent, are against the policy of the law.”], 3513 [“Any one may waive the advantage of a law intended solely for his benefit. But a law established for a public reason cannot be contravened by a private agreement.”].Footnote 32
Labor Code, § 353 [“Every employer shall keep accurate records of all gratuities received by him, whether received directly from the employee or indirectly by means of deductions from the wages of the employee or otherwise.”].Footnote 33
Labor Code, § 353 [“Such records shall be open to inspection at all reasonable hours by the department.”].Footnote 34
Labor Code, § 354 [“Any employer who violates any provision of this article is guilty of a misdemeanor, punishable by a fine not exceeding one thousand dollars ($1,000) or by imprisonment for not exceeding 60 days, or both.”].Footnote 35
Lu v. Hawaiian Gardens Casino, Inc. (2010) 50 Cal.4th 592, 601 [“[Labor Code section 351] did not reflect a legislative intent to give employees a new statutory remedy to recover any misappropriated gratuities.”].Footnote 36
Labor Code, § 355 [“The Department of Industrial Relations shall enforce the provisions of this article. All fines collected under this article shall be paid into the State treasury and credited to the general fund.”].Footnote 37
Labor Code, §§ 61, 74, 98, subd. (a), 355.Footnote 38
See Cal. Civil Jury Instructions, No. 2100, Conversion.Footnote 39
Lu v. Hawaiian Gardens Casino, Inc. (2010) 50 Cal.4th 592, 603–604 [“To the extent that an employee may be entitled to certain misappropriated gratuities, we see no apparent reason why other remedies, such as a common law action for conversion, may not be available under appropriate circumstances.”].Footnote 40
Bus. & Prof. Code, § 17200 [“As used in this chapter, unfair competition shall mean and include any unlawful, unfair or fraudulent business act or practice and unfair, deceptive, untrue or misleading advertising and any act prohibited by Chapter 1 (commencing with Section 17500) of Part 3 of Division 7 of the Business and Professions Code.”].Footnote 41
Bus. & Prof. Code, § 17204.Footnote 42
See, e.g., Application Group v. Hunter Group (1998) 61 Cal.App.4th 881, 907 [“California courts have recognized that an employer’s business practices concerning its employees are within the scope of section 17200.”]; People v. Los Angeles Palm, Inc. (1981) 121 Cal.App.3d 25, 33 [“That the Labor Code provides similar relief against unlawful labor practices cannot foreclose cumulative remedies under the Business and Professions Code if the alleged misconduct does indeed constitute an unfair business practice.”].Footnote 43
See Labor Code, §§ 2698–2699.5.Footnote 44
Labor Code, § 98.6, subd. (a) [“A person shall not discharge an employee or in any manner discriminate, retaliate, or take any adverse action against any employee or applicant for employment because . . . of the exercise by the employee or applicant for employment on behalf of himself, herself, or others of any rights afforded him or her.”].Footnote 45
Labor Code, § 98.6, subd. (a).Footnote 46
Code Civ. Proc., § 339.Footnote 47
Code Civ. Proc., § 337.Footnote 48
Code Cov. Proc., § 338.Footnote 49
Bus. & Prof. Code, § 17208 [“Any action to enforce any cause of action pursuant to this chapter shall be commenced within four years after the cause of action accrued. No cause of action barred under existing law on the effective date of this section shall be revived by its enactment.”].Footnote 50
Code Cov. Proc., § 340, subd. (a); Amaral v. Cintas Corp. No. 2 (2008) 163 Cal.App.4th 1157, 1199.Footnote 51