This is the fifth post in our monthly series of CDF’s Labor & Employment Law Blog, providing California employers with wage and hour compliance tips and best practices.

In the restaurant/service industry, gratuities (To Ensure Prompt Service or “tips”) motivate individuals to seek employment. Everywhere you turn, even if you did not receive any real service, workers are seeking tips. California employers must be aware of pitfalls that come along when patrons decide to tip.  

California Labor Code section 351 is the primary authority regarding tips. It states: 

“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.”

Below are important tips to assist in managing employees in the service industry:

Cardinal Rule: Tips are the sole property of employees and the employer owns no part of them. California employers should not collect any portion of tips to cover business expenses or “service fees.” Even when tips are paid via credit card, which causes the employer to incur a processing fee, the employer cannot recoup the service fee from any portion of the tip or from the employee’s wages. Moreover, the Labor Code prohibits employers and their agents from taking, collecting, or receiving any portion of a gratuity left for or given to one or more employees by a patron. The only narrow exception is if an employee who is servicing patrons is also an agent of the employer, i.e., manager, supervisor, etc. This is a unique exception and should be addressed very carefully. Cal. Labor Code section 351; Chau v. Starbucks, 174 Cal. App. 4th 688 (2009).

Tips do not apply toward wages. Unlike most other states, California employers are not permitted to credit tips against an employee’s wages to satisfy minimum wage requirements because tips are paid by patrons, not employers. Simply put, tips cannot be considered wages and should not be considered part of the regular rate of pay calculation.  

Tips paid via credit card must be paid to employees by the next regular payday following the patron’s payment of the tip. Depending on how payroll is processed, this added step may complicate compliance. Some employers set cutoff dates for each pay period to help ensure that all hours worked before the cutoff have been reported and can be processed timely for payroll. Labor Code 351 does not contemplate such a practice. So, employers must pay out tips timely as delineated by statute.

Mandatory tip pooling/tip sharing is permissible.  California employers are permitted to require that employees share tips with other staff members that are in the chain of service. Thus, involuntary tip-pooling policies are permissible, but must never be shared with owners, managers, or supervisors (unless the narrow exception discussed above applies). Additionally, the policy must be fair and reasonable. Etheridge v. Reins International, 172 Cal. App. 4th 908 (2009); Chau v. Starbucks, 174 Cal. App. 4th 688 (2009); Leighton v. Old Heidelberg, Ltd., 219, Cal. App. 3d 1062 (1990). Note: Employers must provide employees with notice of any mandatory tip pooling/sharing policy. Additionally, Employers must keep accurate records of all tips received by employees (i.e., date, amount, distribution/pooled).  

Some good news. The California Supreme Court determined long ago that employees do not have any right to pursue claims for violation of Labor Code section 351 in court. Lu v. Hawaiian Gardens Casino, 50 Cal. 4th 592 (2010). However, employees may pursue such claims before the Labor Commissioner.  However, violating Labor Code section 351 will allow an employee to pursue civil penalties under the Private Attorneys General Act (“PAGA”) in court and on behalf of all other similarly situated employees.  The important distinction between recovery in court as compared to the Labor Commissioner is that the employee may obtain an attorneys’ fee award in court. PAGA also provides a procedural mechanism to pursue all other Labor Code violations on behalf of other employees.  

Beware of servers who want to voluntarily skip their breaks. A common workplace issue in the service industry born out of patron tipping is that servers may resist taking compliant breaks. Service employees – and specifically restaurant servers – fear missing out on tips by taking breaks. While employees are technically permitted under the law to choose to skip breaks employers should beware that this presents a potential pitfall. As a reminder, employees who do not work more than 6 hours per day may voluntarily waive their meal break. It is a best practice to document the voluntary waiver. That said, and likely due to the avalanche of meal and rest break class and PAGA actions filed against California restaurants over the last couple of decades, it has become a common occurrence when dining out that a server will introduce a customer to a new server that is taking over a table to accommodate a break. Such practices stop employees from “voluntarily” skipping breaks and support mandatory tip pooling. A disgruntled server who willingly skipped breaks may suddenly flip the script to pursue meritless meal and rest break claims against their employer which are difficult to defend. The litigation costs to defend against these types of claims far eclipse the value of the claims. Employers should make sure their policies and practices are in compliance and well documented to avoid such costly claims.  

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