The service industry in California constantly grapples with the complexities surrounding tips, tip pooling, and mandatory service charges. Recently, on August 23, 2024, a federal appeals court blocked the Department of Labor’s (DOL) controversial 80/20/30 rule in Restaurant Law Center, Texas Restaurant Association v. United State Dept. of Labor. This rule, which created significant compliance burdens for hospitality employers who do not have a more stringent state law (like California), has been vacated by the Fifth Circuit U.S. Court of Appeals, offering immediate relief to employers subject to federal law in the Fifth Circuit, and potentially to all employers, even outside of the Fifth Circuit. The court’s decision aligns with a recent Supreme Court ruling that limits federal agency power, marking a significant shift in the regulatory landscape by limiting the DOL’s regulatory authority. However, California employers must still navigate a different set of state-specific rules. Here are five crucial points every California employer should understand about tips, tip pools, and service charges.

1. Employee Ownership of Tips
Under California law, any voluntary tip left by a customer is the sole property of the employee. Employers are prohibited from taking or sharing any portion of these tips. According to Labor Code section 351, tips belong exclusively to the employee for whom they were intended. But mandated tip pooling agreements can be implemented as discussed below.

2. Legality of Employer-Mandated Tip Pooling
California law allows for employer-mandated tip pooling as long as the process is fair, reasonable, and excludes managers, owners, or supervisors. The courts have upheld tip pooling arrangements where tips are shared among employees in the chain of service, provided that the distribution is reasonable. For example, courts have approved scenarios where a percentage of tips is allocated to waitstaff, busboys, and bartenders, as long as the distribution reflects the actual service contribution of each role.

3. No Tip Credits Towards Minimum Wage
Unlike some other states as discussed above, California law does not allow employers to use tips as a credit toward meeting the minimum wage requirement. This departs from the FLSA that permits employers to credit tips towards an employee’s wages to a certain amount. However, because this is not permitted in California, regardless of the amount of tips an employee receives, the employer must pay the full state, local minimum wage or the minimum wage required for fast-food restaurants under AB 1228. Tips cannot be counted towards satisfying the minimum wage obligation.

4. Eligibility to Participate in Tip Pools
Employees who are part of the “chain of service” can be included in a mandatory tip pool. This includes not just waitstaff, but also kitchen staff, bartenders, and dishwashers who contribute to the service experience. However, managers, owners, and supervisors generally cannot partake in the tip pool. An exception exists in specific cases where a service employee, who also acts as a supervisor, can share tips left in a collective tip box. Employers should approach this exception cautiously to avoid legal liability.

5. Distinction Between Tips and Mandatory Service Charges
It’s essential for employers to distinguish between tips and mandatory service charges. While tips are voluntary and belong to the employee, mandatory service charges are set by the employer and belong to the business. Employers have discretion over how to distribute these charges, but must include them when calculating an employee’s regular rate of pay for overtime purposes. Failure to do so can result in costly legal repercussions.

    By understanding these five key points, California employers can navigate the complexities of tip-related regulations more effectively, ensuring compliance with state laws while fostering a fair and transparent workplace for their employees.