Clients in the restaurant and food services industry often ask me about California laws on paying tips. Here are the basics on paying tips in California.
General Rules on Paying Tips in California
Definition of gratuity – “Gratuity” is defined by the California Labor Code as a tip, gratuity, or money 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 for services rendered or for goods, food, drink, articles sold or served to patrons. It also includes any amount paid directly by a patron to a dancer covered by IWC Wage Order 5 or 10.
Rule #1 – Gratuities are the sole property of the employee or employees to whom they are given.
Rule #2 – According to California Labor Code Section 351, employers may not share in or keep any portion of a tip or gratuity that a patron left for or gave to one or more employees.
Rule #3 – It is illegal for employers to deduct the employee’s wages from the tips, or from using the gratuities as direct or indirect credits against an employee’s wages.
Q&A on Paying Tips in California
Q. Is it ok for the employer to require waiters to share tips with the busboy and the bartender?
A. YES. Labor Code Section 351 provides that “every gratuity is hereby declared to be the sole property of the employee or employees to whom it was paid, given, or left for”. The section has been interpreted to allow for involuntary tip pooling so long as the tip pooling policy is not used to compensate the owner(s), manager(s), or supervisor(s) of the business, even if these individuals should provide direct table service to a patron or are in the chain of service to a patron. The policy must be fair and reasonable. You may want to consider adding such a policy to your Employee Handbook.
Q. When a customer pays their bill with a credit card and the payment includes a tip, when must the employer pay the tip to the employee?
A. Payment of a tip made by a patron using a credit card must be paid to the employee not later than the next regular payday following the date the patron authorized the credit card payment.
Q. May an employer deduct the credit card processing fees from employees’ tips?
A. NO. Labor Code Section 351 provides that the employer must pay the employee the full amount of the tip that is indicated on the credit card. The employer may not make any deduction for credit card processing fees or costs that are charged to the employer by the credit card company from gratuities paid to the employee.
Q. Are the tips left for employees considered part of their “regular rate of pay” for overtime calculations?
A. NO. Since tips are voluntarily left for employees by the customer of the business and are not being provided by the employer, they are not considered as part of their regular rate of pay when calculating overtime.
Q. Is a mandatory service charge the same as a tip or gratuity?
A. NO. Therefore, when an employer distributes all or part of a service charge to its employees, the distribution may be at the employer’s discretion and the service charge, considered a bonus, would be included in the regular rate of pay when calculating overtime payments.
Q. In California may a restaurant pay employees less than the minimum wage and include tips in the employees’ hourly pay.
A. NO. Unlike under federal regulations, in California an employer cannot use an employee’s tips as a credit towards its obligation to pay the minimum wage. California law requires that employees receive the minimum wage plus any tips left for them by patrons of the employer’s business.
The vast majority of restaurants and dining establishments in California are small, family-owned businesses. It is a stressful industry with many moving parts. California and federal employment laws are complicated and fast changing and an expensive lawsuit by one or all of your employees could put your business at risk.
UPDATED: Ninth Circuit ruled on restrictions in tip pooling.
If you have any questions or need assistance with your policies and procedures to ensure compliance with the law, contact me or call (949) 529-0007.
Please read our disclaimer.