Summary of California Tip Laws
This section provides an overview of current California tip laws and their overarching philosophical objectives. All California labor law regulations and associated wage statement analysis include certain baseline principles and philosophical objectives. In the case of California tip laws, these noted objectives include the following: California’s statutory regulation of tips is established in Labor Code §351. Labor Code §351 is the only California statute addressing the subject of this article. In recent years, there have been a few California Court of Appeal decisions added to the growing jurisprudence fielding the topic of California’s tip law regime. These publications are discussed under the points below. First and foremost, Labor Code §351 "expressly prohibits employers from participating in tip pools." (Kinney v. Court (2007) 40 Cal.4th 154, 173.) This prohibition extends to all levels of the employer hierarchy including "managers, supervisors, and other agents of the employer at any level." (Ibid., citing Coleman v. Estrellita [1996] 9 Cal.4th 1, 10.) (Emphasis in original.) The prohibition only applies, however, during hours of "direct service to the public," not "while engaging in other duties such as staffing the cash register." (Kinney v. Court, supra, 352 (disapproving of Washington, D.C. case law interpreting the Fair Labor Standard Act’s tip pool and minimum wage laws.) Labor Code §351 also prohibits employers from using tipped employees’ tips to satisfy their minimum wage requirements. (Labor Code §351.) However, the statute does not specifically address whether employers may retain any portion of the tips for their own benefit. The statutory language at issue has only been reviewed twice . The initial case upholding the prohibition language of Labor Code §351 is O’Connor v. Uber Techs., Inc. (N.D. Cal., Dec. 19, 2014, No. 13-cv-03826) 2014 U.S. Dist. LEXIS 175458, at *21-22. In O’Connor, the Court interpreted the plain terms of the statute in finding Uber liable for committing "a crime" by calculating drivers’ pay in a manner which "resulted in Uber keeping drivers’ gratuities." The second case reviewing the statutory prohibition language is Baas v. Dollar Tree Store (E.D. Cal. Feb. 11, 2021) 507 F.Supp.3d 710. In its analysis, the Baas Court articulated that a tip is personal to the employee and that the policy rationale of §351 is that "the customer has a right to determine who receives a gratuity." (Ibid. (citing Kuxhausen v. Baldonado (2013) 219 Cal.App.4th 1, 16).) Lastly, the primary objective of California tip law is to fully protect the gratuities from any arriving labor costs. This rationale can be seen by looking at a few critical details of Labor Code §351. First, the statute refers to "gratuities" instead of "tips." (Labor Code §351.) As is well understood, there is a critical distinction between a tip and a gratuity. A tip is a discretionary amount given by customers for services they deem were satisfactory, or even exceptional, given the nature of their encounters with the service staff. Tips may be scant or sometimes quite abundantly distributed. On the other hand, a gratuity is a mandatory payment from the customer regardless of whether they felt the services were satisfactory. Gratuities are enforced through service fees. Service fees are mandatory once imposed. Last, there are no statutory interpretations addressing the use or designation of tip jars. There has been no limitation or maxim set, for example, on retained tip jar amounts.
Tip Distribution in California
In California, the law is crystal clear that tips may not be shared with "management" of a restaurant or business, as described below. The distributing of tips among workers can be a fairly tricky legal issue, and one that most workers have no idea about since little is explained when tips are paid out on a paycheck or paid out in cash. Many employers do not realize the requirements either and unwittingly violate the law with regularity. As is so often the case, the law requires employees to be treated better than what is common business practice. Below is a discussion of how tips should be split, as required by California law.
California law makes clear that servers may only share gratuities with other employees who perform an "essential function"; that is, a function that is part of carrying out the core job function ("under the supervision of any manager or supervisor" 3 CCR 13690(a)). Thus, a host or hostess may share with the servers, since they are "serving guests." But employees who perform duties "that reinforce and assist the work of the service staff (i.e., the "back-up" staffs, such as coat checkers, concierges, clerks, etc.)" are not part of the core function and may not be tipped. 3 CCR 13690(b).
As to managers, the law is even more clear: "No employer or supervisor may receive any part of any gratuity. Receipt of any part of any tip by an employer or supervisor shall be deemed to constitute an illegal diversion of wages due and owing to the patron. 3 CCR 13690(c) (emphasis added). There is no "fuzzy area" as to how tips are to be split – if an employee is a manager or supervisor, then he or she is prohibited from receiving tips. No matter if the supervisor is on the clock or out of uniform, he or she may not receive a tip.
Tips and the Minimum Wage
Neither tips nor gratuities may be credited as wages. In short, this means that tips cannot serve as a substitute for minimum wages or overtime. Wage Order 5-2001, in part, provides: "(A) No credit shall be given by the employer for tips, gratuities or service charges which are the property of employees." This fact may come as a shock to many servers, who often don’t see any portion of "optional" customer gratuities that are automatically added to a banquet bill, or that are otherwise automatically charged to patrons.
For example, and pursuant to Wage Order 5-2001, some restaurants that charge an automatic service charge on each dining bill have been sued under the FLSA and California law for failing to pay minimum wage and overtime to servers, bartenders and other tip workers. The plaintiffs argue that the service charge is actually a mandatory tip reflecting a set percentage of the total bill, rather than an actual service charge intended to reimburse the employer for additional services provided at the event. Plaintiffs further argue that the employer must pay minimum wage and/or time and a half for all overtime work, because they allegedly used the service charge to reduce the amount paid to bartenders and other tip employees to less than the prevailing minimum wage. See Garcia v. Brown Hospitality Group, Inc., 2008 U.S. Dist. Lexis 9934 (February 5, 2008) (holding that, despite multiple theories of liability, the defendant’s practices were lawful, and that plaintiffs’ claims failed as a matter of law; court refused to certify class of servers); see also Otey v. CrowdFlower, 2013 U.S. Dist. Lexis 70949 (N.D. Cal. May 20, 2013) (defendant’s class action waiver unenforceable under California law).
However, in Garibaldi v. Aloha Pacific, 370 F.2d 996, 998 (9th Cir. 1996), the court correctly recognized that a gratuity is purely voluntary, and does not affect the employer’s obligation to pay minimum wages or overtime. Furthermore, California Labor Code §351 makes it clear that no employer may use gratuities as a credit towards minimum wage or overtime expenses, even if the gratuity is characterized as a mandatory service charge. This means that tip employees must be paid a base hourly wage of at least the minimum wage for all hours worked, regardless whether the employer makes any profits on those sales.
Despite the foregoing clear prohibition, employers, courts and restaurant operators have interpreted the prohibition on "tips or gratuities" broadly. As such, in addition to mandatory service charges and "banquet service fees," the Department of Labor ("DOL") has taken the position that fees charged specifically for private parties and special events may not be credited toward minimum wage and overtime, and cannot be contributed to a pool that is distributed to servers. Further, the DOL has contended that mandatory uniform and other fees levied by employers may reduce wages payable to other servers below the minimum wage.
As a matter of best practices, employers should not include any mandatory service charges in their minimum wage budgets, and should not make deductions from a tip employee’s paycheck for mandatory uniform costs. Indeed, given the numerous nuances and interpretations to a seemingly simple tip pool agreement, great care must be exercised to avoid inadvertent tip pool violations. However, it is important to note that certain plaintiffs’ attorneys have begun to target any employer that has a tip pool in place, and can be hostile to the employer’s legitimate refusal to let mandatory service charges partially constitute the tip pool under any circumstance.
California Tip Credit Laws
California does not allow for a tip credit. This means that employers must pay the full minimum wage for all hours worked. While such states as Texas and Nebraska allow for a tip credit, California is not one them. This causes the direct wages earned by workers to be higher than in other states.
In those states which allow for a tip credit being used to reduce direct wages, direct wages are much lower than the state minimum wage. For example, in Texas, the current minimum wage for persons who do not regularly receive tips is $7.25. That same status in California is $14. This difference can have a serious impact on the finances for low-income workers on a daily basis, especially when calculating overtime rules.
For example, in California, the overtime wages due for a 10-hour shift with two hours overtime is $280. In other states where there is a tip credit and wages below the current state minimum wage, the overtime wages due would be $210. This difference in income can mean a significant amount of assistance for those working in the low-income wage bracket of "tipped income."
Tip vs. Service Charge
A service charge is considered a mandatory charge to a customer for a certain type of food or drink; however, a "tip" is considered a discretionary charge. Whereas the employer must notify the consumer that the service charge is required regardless of whether the consumer will be receiving the service for which the charge is applied, there is no requirement that the employer inform the consumer of a discretionary tip. Since a tip is voluntarily paid to an employee by the consumer and given separately from the customer’s bill, tips may also be considered a gift. If the employer either compels the employee to contribute that tip to the employer and/or the employer keeps the tips (or any portion thereof) for itself, the tip then becomes a service charge. Because the employer cannot compel its employees to contribute a portion of their tips, these kinds of mandatory payments are ultimately the employer’s responsibility to pay to its employees. If the employer passes on that responsibility (i.e., by mandating that its employees share or pool tips), then the employer must comply with California Labor Code § 351. Otherwise, tips remain the property of the employee. It is important to recognize that there is a labor code prohibition against employers collecting, directing, controlling, or otherwise in any way causing its employees to share their gratuities, tips, or service charges with management staff. Employers are also prohibited from taking a portion of their employees’ gratuities, tips, or service charges for themselves. Moving onto wages , while California Labor Code § 351 states that an employer may not use any part of the gratuities given by patrons of the business for the benefit of the employer, it does not exclude a credit to the wages of an employee. Further, service charges that are distributed to the employee with regular wages are earned by the employee at the time the work for which it was paid for was performed; therefore, it is wages. Conversely, tips are always considered gifts and therefore not owed, even if given to the employer. To be considered wages, the employer must require the employee to accept the service charge. The majority of them often go directly to the establishment but there are some exceptions. For example, pooled service charges that are distributed equally among employees then become wages earned when the service charge is taken from the customer because they must be given to the employee. While it is acceptable for an employer to require its employees to share part of their tips with other employees, it does not relieve the employer of its duty to reimburse the employee for the remainder of the tip. Tips or gratuities received by an employee and retained by an employer are considered wages earned by the employee at the time that those tips or gratuities were given by patron of the business. In other words, an employer can require an employee to share tips, but only if the employee gets the money and gives some of it to another employee. However, an employer may not require its employees to pool their tips or share them with the employer or management staff.
Legal Ramifications of Tip Law Violations
Tip laws in California, including wage theft, are being utterly taken seriously by the California Labor Commission and the California Division of Labor Standards & Enforcement (DLSE). Failing to provide the tipped employees with a copy of the tip policy can lead to legal consequences. Violating tip laws can result in a tip credit claim if proven. The employer may be liable to pay all tipped wages, including the tips that were to be allocated to the servers per CA Labor Code, prior to any offsets. An employer who violates tip laws may also incur civil penalties under CA Labor code section 558. Further, an employee who is given the wrong tip policy may be able to sue for $400 per violation under section 90, and the employer will be liable to pay an additional 100% penalty of the unpaid wages and the employer’s "antiquated" policies. The Labor Commissioner has been extremely suspicious of any and all amounts deducted from the employees’ paychecks, as it views these deductions as "fraudulent." For example: This conduct would lay the foundation for an employee’s lawsuit. Serves in Santa Monica Beach Club v. Apple Nine Palm Beach Club, Inc., an employee filed a labor claim alleging that the employer imposed a 30% tip-out on all credit cards and only paid 10% to the servers. The 20% difference resulted in charges of theft, and the DLSE ordered the employer to pay the remaining 20% per complaint. The employer did not pay, so the matter went to trial. The Judge ruled in favor of the employee and awarded $50,000 for unpaid tips and $149,592.17 in attorneys’ fees and costs (amount should be much higher due to the appellate victory and the writ petition). In Levy v. Johnny Rockets, the Labor Bureau ordered an employer to pay employees $230,000 in tips which were paid to an investment firm. The Judge ordered the employer to directly pay these servers $6,550,320 in restitution. And in Arriaga v. Royal Seafood Buffet, the employer was fined over $300,000 for spending the tipped wages illegally, which included deducting laundry fees from tipped employees’ pay.
Recent Developments and Updates to California Tip Laws
As of this past August, the Ninth Circuit Court of Appeals decided to not publish its May 12, 2015 opinion, Vasquez v. CG Roxane LLC, Docket No. 12-56528, reversing the district court’s decision in Vasquez v. CG Roxane LLC, 2013 U.S. Dist. Lat LEXIS 84758 (C.D. Cal. June 12, 2013), and ruling that California Labor Code section 351 does not require an employer to pay tips to its employees who serve as product demonstrators, and deciding that the proper place to direct an employee’s challenge is a Labor Commissioner’s conference, not a federal court. The Eighth District Court of Appeal, however, published its August 13, 2015 opinion, (See Rivas v. Bacquet-Cleveland LLC (2015) 238 Cal. App. 4th 1268.).
In addition to Rivas, several other cases have recently come down from all of the districts and courts of appeal issuing opinions on California tip law. Here are just a few: The key takeaway is that tips are not wages, and even with California’s strong public policy concern in favor of protecting the rights of its citizens, the Legislature through Civil Code section 351 has decided that a gratuity is a gift bestowed by a patron upon his favorite waiter or waitress.
California Tip Law FAQ
What is the tip credit and does California have one?
A tip credit permits the employer to take a portion of the employee’s tips to meet minimum wage requirements. However, California does not have a tip credit. Tips are the property of the employee, and the employer has no right to any of the employee’s tips for any reason. The employee must retain all of his or her tips and therefore, must be paid minimum wage that is not reduced by an additional tip credit.
Do all tips belong to the employee?
Yes. Any property left by a patron at a restaurant, a hospitality suite, a banquet, or any other location will belong to the employee, not to the employer. In fact, the law in California is so clear that if an employer violates the tip laws by requiring a tip pool or serving as an intermediary to a customer’s tip, employees’ tips are subject to treble damages if taken by the employer.
Are tips part of a server’s wages?
No. Tips are not part of the servers’ wages. The server however can’t be required to receive minimum wage because he or she must also be entitled to the tips from the customers.
Can employers require tipped employees to share their tips with other employees?
The California Labor Code section 351 prohibits employers from requiring employees to share tips. Per the law, every "tip or gratuity received by an employee" is the "sole property" of the employee.
May an employer implement a mandatory tip pool?
Generally speaking , yes. The employer may require servers to pool their tips and share them with other employees who customarily receive tips, such as bell hops, bussers, and bartenders. However, the tip pool may only include employees who customarily and regularly receive tips under California law. Employers may not use a tip pool for managers and employees who do not customarily and regularly receive tips. Employees may only be required to participate in a tip pool for which tips were intended. In other words, a barista may be required to share his or her tips with servers who deliver food, but a server may not be required to split tips with a barista.
Can a bartender be required to participate in a tip pool in a restaurant setting?
Generally speaking, yes. Under California law, tips or gratuities remain the sole property of the employee. An employer may not take any of the employee’s tips or attempt to take a portion of the tips. That said, the employer may, at its discretion, require the bartender to share his or her tips with other employees who customarily and regularly receive tips, such as servers.
Are there restrictions on tip pooling?
Yes, the law in California requires the tip pool be limited to employees who customarily and regularly receive tips. If the job does not involve customer interaction and the workers are not performing tasks that provide direct service to customers, they may not be included in the tip pool.
