An issue that constantly plagues the service industry is what to do about tips and the challenges that come with mandated tip pooling and mandatory service charges. We still routinely counsel restaurant clients on the intricacies regarding tips, mandatory tip pools, and service charges. This simple concept, which should be relatively easy, becomes complex under California law.  Here are five issues employers should understand about tips, tip pools, and service charges in California.

1) Who owns a tip?

California law is clear that voluntary tips left for an employee for goods sold or services performed belong to the employee, not the employer. Labor Code section 351 provides, “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…. Every gratuity is hereby declared to be the sole property of the employee or employees to whom it was paid, given, or left for.”

2) Is employer-mandated tip pooling legal?

Yes, generally tip pooling is legal in California as long as it is fair and reasonable (and owners/managers/supervisors are not involved in the tip pool as discussed below). In Leighton v. Old Heidelberg, Ltd., the court held that an employer’s practice of tip pooling among employees was not prohibited by section 351 because the employer did not “collect, take, or receive” any part of a gratuity left by a patron, and did not credit tips or deduct tip income from employee wages. The court relied upon the “industry practice” that 15% of the gratuity is tipped out to the busboy and 5% to the bartender, which was “a house rule and is with nearly all Restaurants.”

There must be a reasonable relationship between tip pooling arrangements.  The following examples of mandatory tip pooling percentages have been approved by a court, the DLSE or DOL:

  • A policy in which 80 percent of tips were allocated to waiters, 15 percent to busboys and five percent to bartenders
  • A policy in which cocktail service must give one percent of tips to bartenders
  • The Department of Labor responsible for enforcing Federal law has stated that a policy that requires servers to share 15 percent of their tips with other employees is presumptively reasonable
  • A policy in which a server contributes 15 percent to a tip pool, and other employees in the chain of service receive a portion of these tips based on the amount of hours they worked

The following examples were tip pooling policies disapproved by courts or the DLSE and therefore employers cannot legally establish them:

  • A policy providing 90 percent of tips to hostesses who spend only a small amount of time seating customers
  • A policy requiring food server to share 10 percent of tips with floor managers

3) Who can share in the tip pool?

Employees in the chain of service:

Generally, employees who are in the “chain of service” may partake in a mandatory tip pool. In Etheridge v. Reins International California, Inc., the servers challenged the inclusion of employees, such as kitchen staff, bartenders, and dishwashers, who do not provide direct table service in the mandatory tip pool. The California Court of Appeals confirmed that employees who do not provide direct table service but are in the “chain of service,” such as kitchen staff, bartenders, and dishwashers, are allowed to participate in mandatory tip pools. The Court reasoned that this would encourage all staff in the chain of service to give their best service, regardless of whether the customers personally see them performing the work.

Managers, owners, or supervisors:

Labor Code section 351 prohibits agents from keeping a share or any portion of gratuities left or given to one or more employees by a customer. However, the California Court of Appeal in Chau v. Starbucks Corp. found that a service employee who is also an agent, such as the shift supervisor, can participate in tip pools for tips left in a collective tip box for all service employees. While Chau permitted employers to include supervisors in tip pools, that case addressed a very specific set of facts, and employers must approach the issue of including supervisors in tip pools with caution.

4) Do tips change an employee’s minimum wage or regular rate of pay for overtime calculations?

No. Because tips are voluntarily left by customers to employees, tips do not increase an employee’s regular rate of pay used to calculate overtime rates.

Additionally, California law does not allow employees to “credit” an employee’s tips towards the minimum wage. Therefore, employers should still ensure to pay employees the state (or local) minimum wage.

In addition, Labor Code section 351 requires that employers pay the employee any tips that a patron paid by a credit card no later than the next regular payday.  Also, employers may not deduct any credit card processing fees from the amount of the tip left for the employee on the credit card. 

5) Are mandatory service charges the same as a tip?

No. A tip is voluntarily left by the patron, while a mandatory service charge is a mandatory charge to the patron by the employer.

While a tip is considered the employee’s property, a mandatory service charge is considered the employer’s property. Thus, unlike with tips, an employer may distribute all or part of the service at their discretion. However, this freedom comes with strings: the amounts paid to employees as a mandatory service charge must be considered when calculating the employee’s regular rate to calculate overtime rates. As a reminder, to calculate an employee’s regular rate of pay, the employer must divide all compensation for the week by the total number of hours worked by the employee.