California employers can now include back-of-the-house workers (e.g., dishwashers, cooks, and chefs) in their tip pool systems.  The rule seems simple enough, however, the path to this conclusion was a rather contentious journey.  Moreover, the current law on tip-pooling is subject to qualifications that require examination of both California and federal law, with which California employers must also comply.

California grappled with the issue of which workers should be included in tip pools before the recent changes announced by the federal government.  In the seminal 1990 case on tip pooling, Leighton v. Old Heidelberg, Ltd., a California appellate court upheld a tip-pooling arrangement among servers, bussers, and bartenders, stating that tip pools are permissible as long as they are “reasonable” and the employer does not retain any portion of the tips.  The Old Heidelberg case focused on which employees had “touched the table,” since the court presumed that when a patron left a tip, it was meant for someone with whom the patron had contact.

Over the next several years, California appellate courts revisited the issue of tip pooling, further defining which persons should be included in tip pools.  Among these cases was the Jameson v. Five Feet Restaurant decision which explained how employees with management duties may not share in a tip program.

Then, in 2009, a California appellate court approved a mandatory tip-pooling policy requiring servers to pay out a share of their tips to the kitchen staff, bartenders, and dishwashers in a decision entitled Etheridge v. Reins Int’l California, Inc.

On the federal front, in March of this year President Donald Trump signed into law the omnibus budget bill, the Consolidated Appropriations Act of 2018.  The Act contains a two-page amendment to the rules regarding “tipped employees” in the Fair Labor Standards Act that allows tips to be shared with back-of-the-house employees and prohibits managers and supervisors from participating in the tip pool.  As a result, California law and federal law now share a common rule that employers may include kitchen staff in a legitimate tip pool.

However, important differences remain between federal law and California law on tip pooling.  Under federal law, employers may use customer tips as a “credit” against their minimum wage obligations for tipped employees.  In contrast, California law prohibits any tip credits.  Moreover, it is unclear how federal law will ultimately define which management personnel must be excluded from a tip pooling arrangement.

Employers should also exercise caution to ensure that their tip pools meet other tests under the law, which include satisfying the following factors:

• No management personnel may participate in the pool;
• The percentages are reasonable; and
• Other personnel who participate are appropriate participants.

Aside from the various factors outlined above, employers should consider the practicalities of including additional persons in a tip pool.  For example, expanding any tip pool to include more workers will necessarily mean that others will not be making as much money as they once did, which may have an adverse impact on morale and employee retention.

This article is intended as a brief overview of a rather complicated subject.  Although it is now clear that both federal and California law permit the inclusion of back-of-the-house staff in tip pools, open questions remain on how the criteria governing tip pooling systems should look in application.  For inquiries regarding how to structure or revise tip pooling arrangements, employers should contact legal counsel.