In addition to the “sanctuary state” legislation signed into law by Governor Brown yesterday, the Governor also signed AB 450 into law.  The law is effective January 1, 2018, and requires, among other items, employers to verify that immigration officials have a judicial warrant or subpoena prior to entering the workplace and for employers to provide notice to employees if there has been a request to review the employer’s immigration documents, such as Form I-9s.  The new law puts employers in a difficult situation of having to comply with federal immigration law obligations on one hand and state law requirements on the other, with large penalties that could result for violations of either law.  This Friday’s Five discusses five key aspects California employers must understand about the new obligations created by AB 450.

1. Employers may not voluntary consent to an immigration enforcement agent to enter any nonpublic areas of “a place of labor” without a subpoena or judicial warrant.

The new law provides that employers cannot provide voluntary consent to an immigration enforcement agent to “access, review, or obtain the employer’s employee records without a subpoena or judicial warrant.”  This prohibition does not apply to I-9 Employment Eligibility Verification form and “other documents for which a Notice of Inspection has been provided to the employer.”

2. Employers must give notice to employees of any immigration review of employment records.

Employers are required to post information about any inspections of I-9 Employment Eligibility Verification forms or other employment records conducted by an immigration agency within 72 hours of receiving notice of the inspection.  The notice must be posted in the language the employer normally uses to communicate employment-related information to the employee.  In addition, the notice must include the following information:

(A) The name of the immigration agency conducting the inspections of I-9 Employment Eligibility Verification forms or other employment records.

(B) The date that the employer received notice of the inspection.

(C) The nature of the inspection to the extent known.

(D) A copy of the Notice of Inspection of I-9 Employment Eligibility Verification forms for the inspection to be conducted.

The Labor Commissioner is required to publish a template for employers to use by July 1, 2018.

3. An employer, upon reasonable request, shall provide an “affected employee” a copy of the Notice of Inspection of I-9 Employment Eligibility Verification forms.

An “affected employee” is an employee identified by the immigration agency inspection results to be “an employee who may lack work authorization, or an employee whose work authorization documents have been identified by the immigration agency inspection to have deficiencies.”

The employer is required to provide the affected employee a copy of the written immigration agency notice that provides the results inspection within 72 hours of after receipt of the notice. In addition, the employer shall also provide written notice of the obligations of the employer and the affected employee arising from the results of the records investigation.  The notice needs to relate to the affected employee only and shall be delivered by hand at the workplace if possible and, if hand delivery is not possible, by mail and email, if the email address of the employee is known.

4. Except as otherwise required by federal law, employers cannot reverify the employment eligibility of a current employee at a time or in a manner not required by federal law

Violations of this provision can result in civil penalties up to $10,000.

5. Potential penalties.

Penalties for failure to provide the notices required under the new law are $2,000 up to $5,000 for a first violation and $5,000 up to $10,000 for each subsequent violation.  The penalties will be recovered by the Labor Commissioner.

 

 

Happy Friday.  Through my defense of wage claims this year, I found that employers need to establish and periodically review issues pertaining to employees’ timekeeping.  This Friday’s Five is a list of the top five timekeeping issues that employers should routinely audit:

1. Establish and communicate a time keeping policy

Employers should establish and regularly communicate a time keeping policy to employees.  The policy should set forth that employees always have an open door to complain to their supervisors and other managers or human resources about missed meal and rest breaks, unpaid wages, or unpaid overtime.  If employees routinely acknowledge that they understand the time keeping policy and are agreeing to record their time through the employer’s system, this can go a long way in defending any off-the-clock claims.

2. Rounding

Employers need to review whether their time keeping system or payroll company is rounding employees’ time.  While rounding can be legal under California law, employers must still meet certain requirements to have a compliant rounding practice.  In See’s Candy Shops Inc. v. Superior Court, a California court held that the employer’s rounding policy that rounded both up and down from the midpoint of every six minutes was permitted under California law.  The employers’ policy did not result in a loss to the employees overtime.  Therefore, the court found it to be lawful.  Employers need to review:

(1) Do they have a rounding policy?

(2) If they do round, is the policy compliant with the law?

(3) Is a rounding policy necessary or is it easier to pay the exact time the employee clocks in and out?

3. De minimis time

Employers need to review if they are compensating employee for all time worked.  The de minimis doctrine may permit employers a defense for claims by employees that they were not compensated for very small amounts of time that are difficult to track.  The de minimis doctrine holds that “alleged working time need not be paid if it is trivially small: ‘[A] few seconds or minutes of work beyond the scheduled working hours … may be disregarded.’” Troester v. Starbucks Corporation (this decision is currently under appellate review).   More information about the de minimis doctrine can be read here.  While this defense may be available to California employers, employers should not rely upon the defense when it is known the employee is working time that is not compensated.

4. Record meal breaks

In addition to recording the start and stop times for employee’s work, employers are required to record when employees take meal breaks.  The Wage Orders require that California employers keep “[t]ime records showing when the employee begins and ends each work period. Meal periods, split shift intervals and total daily hours worked shall also be recorded. Meal periods during which operations cease and authorized rest periods need not be recorded.”  IWC Wage Order 5-2001(7)(a)(3).

5. Time records

Under Labor Code section 1174, employers are required to keep time records showing the hours worked daily and the wages paid, number of piece-rate units earned by and applicable piece rate paid.  These records must be maintained in the state or at the “plants or establishments at which employees are employed.”  The records must be kept for at least three years.  Labor Code section 1174(d).  The statute of limitations for wage claims can extend back to four years, so employers generally keep the records for four years.

I spoke at the Western Foodservice & Hospitality Expo last week regarding marijuana in the workplace and employer’s right to test for and prohibit the use of marijuana.  While employers generally still have the right to test employees for and prohibit marijuana in the workplace, employee’s still have privacy interests that employers need to aware of.  For example, Article I, Section I of the California Constitution guarantees citizens a right of privacy:

All people are by nature free and independent and have inalienable rights. Among these are enjoying and defending life and liberty, acquiring, possessing, and protecting property, and pursuing and obtaining safety, happiness, and privacy.

This right to privacy carries over to the workplace, but is even more protected when the employee is conducting personal activities during non-working hours. On top of this general right to privacy, there are statutory protections provided to employees as well.  Below is a list of items concerning employee conduct that cannot be regulated by an employer under California law:

  1. Employers cannot prohibit employees from discussing or disclosing their wages, or for refusing to agree not to disclose their wages. Labor Code Sections 232(a) and (b).
  2. Employers cannot require that an employee refrain from disclosing information about the employer’s working conditions, or require an employee to sign an agreement that restricts the employee from discussing their working conditions. Labor Code Section 232.5.
  3. Employers may not refuse to hire, or demote, suspend, or discharge and employee for engaging in lawful conduct occurring during nonworking hours away from the employer’s premises. Labor Code Section 96(k).
  4. Employers cannot adopt any rule preventing an employee from engaging in political activity of the employee’s choice. Labor Code Sections 1101 and 1102.
  5. Employers cannot prevent employees from disclosing information to a government or law enforcement agency when the employee believes the information involves a violation of a state or federal statute or regulation, which would include laws enacted for the protection of corporate shareholders, investors, employees, and the general public. Labor Code Section 1102.5.

Happy Friday!

With the end of summer quickly approaching, this Friday’s Five (and next week’s post as well) covers broad topics employers should review periodically.  Today’s post covers five questions a company operating in California should be asking on a routine basis:

1. Has the company reviewed and updated the employee handbook and related policies?

As discussed in last weeks Friday’s Five about the new court decision on vacation pay in Minnick v. Automotive Creations, an employer’s policies are critical in defending claims.  Vague or out dated policies can create huge amounts of liability for employers. California’s requirements change throughout the year, and it is important that employers have a good relationship with employment counsel so that they are routinely communicating and reviewing the need to update policies based on new case law and legislation.

2. Does your company train supervisors and employees on its handbook and other policies, and does the company standby what it tells employees in these policies?

Legally drafted policies only get your company half of the way there.  Companies need to train managers and supervisors about what the policies mean and how they need to be implemented day-to-day.  Furthermore, the company needs to follow-through with what it tells supervisors, managers, and employees.  For examples, if the company maintains an open door policy, but none of the employees are utilizing the open door policy there could be a problem.  One solution is for the company to start pro-actively having open door sessions with employees to discuss their experience at the company (my post next week will discuss what should be asked during these open door sessions).

3. Has the company conducted a review of a local county and city laws that apply?

State, county and city laws regulating minimum wage and paid sick leave are numerous and California employers need to ensure they have closely reviewed they are complying with these requirements.  As Carl’s Jr. is finding out, noncompliance can have steep penalties.

4. When was the last time the company conducted an internal wage and hour audit internally? When was the last time an external lawyer or other professional reviewed wage and hour practices?

Many companies establish policies or simply continuing using policies from the past that have never been reviewed internally or externally by a lawyer or other professional.  I’ve published an HR audit list that covers a few of the essential areas that must be reviewed to lower a company’s legal exposure in California.

5. Is there an open line of communication with the employer’s payroll company and have specific wage and hour compliance issues been discussed?

The information that must be listed on employee’s pay stub is detailed, but easy to comply with.  A model pay stub published by the State Division of Labor Standards Enforcement can be found here (but note this only lists the state requirements – any other local county or city requirement will also apply).  The model pay stubs does not list paid sick leave, which employers must also remember to list on the employee’s pay stub or other writing provided to employees when they are paid.

Many payroll companies do not review the accuracy of the information listed on the pay stubs they generate, and this burden falls on the employer.  In addition to the California Labor Code requirements of the information that must be listed on pay stubs, the local requirements for reporting the amount of paid sick time available to employees must also be provided.  Employers need to proactively review and discuss these requirements with their payroll companies.

In this Friday’s Five I recommend books that I am either reading and have read related to managing employees or a business.  I hope everyone is having a great summer.

 

1. Manager Onboarding: 5 Steps for Setting New Leaders Up for Success

By Sharlyn Lauby

 

2. 101 Tough Conversations to Have with Employees: A Manager’s Guide to Addressing Performance, Conduct, and Discipline Challenges

By Paul Falcone

 

3. 101 Sample Write-Ups for Documenting Employee Performance Problems: A Guide to Progressive Discipline & Termination

By Paul Falcone

 

4. How to Win Friends & Influence People

By:  Dale Carnegie

A classic business book not often thought of as a human resources book.  However, many of the principles set out in this book are great practices for human recourse managers.

 

5. The Thank You Economy

By: Gary Vaynerchuk

Anther book not thought of as a traditional human resources book, but many of the lessons set out by Gary on how to market and build a successful business in today’s economy equally apply to human resources and managing a workforce.  Being authentic and focusing on one-on-one interactions with people will always be a good practice, no matter how technical the workplace becomes.

Photo by Ben White on Unsplash

I’m tired of HR getting push to the corner of the executive suite meetings.  I get to see firsthand on a daily basis about how effective HR departments (or even CEOs, CFOs, or other company leaders) who recognize the importance of personally connecting with employees and helping employees develop, are more profitable organizations with reduced litigation costs.  Full disclosure, I developed (i.e., stole) many of these ideas after hearing Gary Vaynerchuk talk about how he values HR so much that he is not just the CEO of VaynerMedia, but he is the head of HR as well.  This Friday’s Five focuses on five reasons why HR needs to be a more critical role in your company:

1. It does not matter what your title or job is – CEO, CFO, HR, or even pilot – you still must have a personal touch.

A few years ago, I took my son to the Red Bull Air Races.  We had a great day watching the pilots racing over the shores of Mission Bay in San Diego.  My son was young, and I debated attending a meet-and-greet with the pilots put on by Red Bull.  The fact that Red Bull put this event on shows that they understand personal relationships in the business context.  So I drove my four year old son to Fox Field east of San Diego to see what it was all about.  Upon arriving, many of the pilots were standing next to their airplanes and had taken down the rope they could have used to protect their planes (and themselves) from the public.  We were able to actually meet most of the pilots, talk to them, and even take pictures with them.  Here were pilots that are some of the best in the world – Kirby Chambliss, Nigel Lamb, and Paul Bonhomme – and they were connecting with fans.  The pilots we met, took pictures with, and spoke to became my son’s (and my) most favorite competitors in the air races.  Still to this day, we still talk about this event, and when we see the air races on TV we are supporting the pilots we met and spoke with.  Gary Vaynerchuk calls it the Ricky Henderson effect, I refer to it as the Nigel Lamb effect (picture of my son and Nigel to the right).

These pilots probably never expected that to be a great pilot that they needed to know how to talk to kids and the public.  But it is this skill that differentiates these pilots from those flying cargo planes.  Plus, they were investing time into making the air races more popular, which equals more profit in the long run.

2. Personal understanding and connections cannot be faked.

It is also important to note that we could easily see which pilots actually liked the meet-and-greet, and the pilots who were only doing it because they had to.  This is a skill that cannot be faked.  If an organization tries to fake the personal aspect of HR, every employee will easily see through this hypocrisy.  It is better to simply not spend the time and money to pretend caring about employees, skip this step, and at least not be viewed as a hypocritical company.

3. Treating employees fairly and on a personal level will reduce litigation.

I’ve written about this before and even though I don’t have any empirical data to prove it, I’m sure Steve Jobs created litigation costs for Apple in the way he treated employees.  To be clear, there is nothing illegal about being a jerk to employees, but most employees don’t understand this.  If an employee feels disrespected they will want to get even, and to get even with the company they will file a lawsuit – meritorious or not.  Plus, with increased turnover, employers are likely to have increased employment litigation.

4. Hard skills are only part of the equation.

It is important for an organization to recognize the A-players who create discontent and chaos in the company are not worth the cost.  These type of employees will eventually bring the entire organization down.  Employees don’t want to deal with assholes, no matter how great the assholes are at their job.  Eventually (this might not be immediate, but will definitely occur over time) the other A-level employees who like being on a team and being treated with respect will leave.

5. HR should be more than filling out paperwork and providing parking cards.

I would argue that a good HR department should delegate task such as providing new hire paperwork or tracking employee’s down if they have not signed the employee handbook.  While the policies and documentation are critical, HR must be viewed as more than the department or person that is responsible for enforcing the policies, making sure paperwork is completed, and throwing a holiday party once a year.  If the paperwork aspect of the job takes away from creating relationships with employees, companies should consider having some other department handle obtaining information for the new hire packets, getting handbooks signed, and following up to ensure that supervisors have satisfied their sexual harassment training every two years.  Having HR focus on the employee development and satisfaction, not the paperwork, could also send a message to employees that the company understands and cares about HR.

In speaking to a few groups of California employers this week, a common question kept coming up about what are the essential Booksemployment policies California employers must have?  While there are more than five, this week’s Friday’s Five starts with what I consider to be critical policies that every California must have in place.

1. At-will policy

Under California law, it is presumed that all employment is terminable at-will. California Labor Code section 2922 provides: “An employment, having no specified term, may be terminated at the will of either party on notice to the other.” The at-will doctrine means that the employment relationship can be terminated by either party at any time, with or without cause, and with or without advanced notice. There are some major exceptions to this rule, but generally California law recognizes that employers and employees may, at any time, and for any legal reason, terminate the employment relationship.

2. Anti-harassment, discrimination and retaliation policy

California’s Fair Employment and Housing Council published new regulations pertaining to anti-discrimination and anti-harassment requirements effective April 1, 2016.  Employers need to review and potentially update their policies in order to meet the new requirements.  The full text of the regulations can be obtained here.

3. Timekeeping policy

California law requires employers to track start and stop times for hourly, non-exempt employees. The law also requires employer to track the start and stop times for the employee’s thirty minute meal periods. The time system needs to be accurate, and the employer needs to be involved in the installation and setup of the system. Do not simply use the default settings for the hardware and software. Understand what the system is tracking and how it is recording the data. Since the statute of limitations for California wage and hour violations can extent back four years, it is recommended that employers take steps to keep these records at least four years.  Employers should also have a complaint procedure in place and regularly communicate the policy to employees in order to establish an effective way to remedy any issues.

4. Meal and rest break policy

As I’ve written about many times previously, employers must have a compliant meal and rest break policy.  Indeed, given the California Supreme Court’s ruling in Augustus v. ABM Security Services in December 2016, employers should review their rest beak policy to ensure it complies with this ruling.

5. Paid sick leave policy

Many local governments in Southern California have passed laws increasing the minimum wage and amount of paid sick leave that must be provided to employees.  Employers must ensure they are complying with the law that provides the most benefits to employees.  Here is a brief summary of some of the local laws in Southern California:

State/City Minimum Wage Paid Sick Leave
1) California $10/hr January 1, 2016; $10.50 January 1, 2017; $11/hr January 1, 2018; $12/hr January 1, 2019; $13/hr January 1, 2020; $14/hr January 1, 2021; $15/hr January 2022* Current: 3 days or 24 hours
2) Los Angeles – City (click here for more information about Los Angeles City’s minimum wage and paid sick leave laws) July 1, 2016: $10.50/hr; July 1, 2017 $12; July 1, 2018 $13.25; July 1, 2019 $14.25; July 1, 2020 $15.00 * (click here for more information about Los Angeles’s minimum wage ordinance) July 1, 2016: 48 hours*
3) Los Angeles – County (applies to unincorporated cities in LA County) Same as LA City (see above) No specific requirement – state law applies
4) San Diego City July 2016: $10.50 (date not set yet – likely effective in first half of July 2016); January 1, 2017 $11.50; January 1, 2019 $11.82; January 1, 2020 $12.15; January 1, 2021 $12.49; January 1, 2022 $12.84 5 paid sick days
5) Santa Monica (click here for Santa Monica’s website for details of the law) $10.50 July 1, 2016; July 1, 2017 $12.00; July 1, 2018 $13.25; July 1, 2019 $14.25; July 1, 2020 $15.00* January 1, 2017: 32 hours for small businesses, 40 hours for large businesses; January 1, 2018: 40 hours for small business, 72 hours for large businesses*
*Employers with 25 or fewer employees the implementation is delayed one year.

Happy Memorial day weekend!

Expense reimbursement may seem like a small issue in comparison with the other areas of liability facing California employers, but the Old Carexposure for not appropriately reimbursing employees can be substantial. In Gattuso v. Harte-Hanks Shoppers, Inc., the California Supreme Court clarified the parameters of mileage reimbursement under California law, as well as the three different methods available for employers to reimburse employees for their mileage reimbursement.  This Friday’s Five post discusses five issues employers need to know about automobile and mileage reimbursement under California law.

1. Mileage reimbursement based on IRS mileage rate is presumed to reimburse employee for all actual expenses

The IRS publishes standard mileage rates each year (and sometimes adjusts these rates during the year). The 2017 IRS mileage rate is as follows:

  • 53.5 cents per mile for business miles driven, down from 54 cents for 2016
  • 17 cents per mile driven for medical or moving purposes, down from 19 cents for 2016
  • 14 cents per mile driven in service of charitable organizations

If the employee challenges the amount reimbursed, the employee bears the burden to show how the “amount that the employer has paid is less than the actual expenses that the employee has necessarily incurred for work-required automobile use (as calculated using the actual expense method), the employer must make up the difference.” Gattuso, at 479.

The California Supreme Court also held that the reimbursement rate can be negotiated by parties as long as it fully reimburses the employee, and the amount does not have to be set at the IRS mileage rate. The Court also warned that employee cannot waive the right to be fully reimbursed for their actual expenses:

We agree that, as with other terms and conditions of employment, a mileage rate for automobile expense reimbursement may be a subject of negotiation and agreement between employer and employee. Under section 2804, however, any agreement made by the employee is null and void insofar as it waives the employee’s rights to full expense reimbursement under [Labor Code] section 2802.

Gattuso, at 479.

2. Actual expense method of reimbursement

In examining the different methods of reimbursement, the Supreme Court held that the actual expense method is the most accurate, but it is also the most burdensome for both the employer and the employee. Gattuso, at 478. Under the actual expense method, the parties calculate the automobile expenses that the employee actually and necessarily incurred and then the employer separately pays the employee that amount. The actual expenses of using an employee’s personal automobile for business purposes include: fuel, maintenance, repairs, insurance, registration, and depreciation.

3. Mileage reimbursement method

The Court recognized that employers may simplify calculating the amount owed to an employee by paying an amount based on a “total mileage driven.” Gattuso, at 479.

Under the mileage reimbursement method, the employee only needs to keep a record of the number of miles driven for job duties. The employer then multiplies the miles driven by a predetermined amount that approximates the per-mile cost of owning and operating an automobile. The Court recognized that the mileage rate agreed to between the employer and employee is “merely an approximation of actual expenses” and is less accurate than the actual expense method. It is important to note that while this amount can be negotiated, the employee still is unable to waive their right to reimbursement of their actual costs as mentioned above.

4. Lump sum payment method

Under the lump sum method, the employee need not submit any information to the employer about work-required miles driven or automobile expenses incurred. The employer merely pays an agreed fixed amount for automobile expense reimbursement. Gattuso, at 480. This type of lump sum payment is often labeled as a per diem, car allowance, or gas stipend.

In Gattuso, the Court made it clear that employers paying a lump sum amount have the extra burden of separately identifying and documenting the amounts that represent payment for labor performed and the amounts that represent reimbursement for business expenses.

5. Don’t forget about other expenses incurred in the “course and scope” of working

In addition to mileage, employers may also have to reimburse employees for other costs they incurred in driving their personal cars for business. In making the determination about whether an employee’s actions are in the “course and scope” of their job, courts examine whether the expense being sought by the employee is “not so unusual or startling that it would seem unfair to include loss or expense among other costs of the employer’s business.” Employers need to be mindful about reimbursing employees for cell phone use, printing and office supplies (if employee is required to maintain a home office or use personal printer for work), and other work related expenses.

Happy Friday!  This Friday’s Five covers five areas that employers can start with in conducting an employment practices Checklistsaudit.  Coming up on the mid-point of the year, it is a good time to conduct an employment law practices audit to ensure that policies are compliant, managers are properly trained, and the company is maintaining the required records for the necessary length of time.  Here are five areas to start with in conducting an audit and a few recommended questions for each topic:

1. Hiring Practices

  • Are applications seeking appropriate information?
    • For example: Be careful about local ban the box regulations.
  • Are new hires provided with required policies and notices?
  • Are new hires provided and acknowledge recommended policies?
    • For example: meal period waivers for shifts less than six hours
  • Are hiring managers trained about the correct questions to ask during the interview?
  • Does the company provide new hires (and existing employees) with arbitration agreements with class action waivers?

 2. Records

  • Are employee files maintained confidentially and for at least four years?
  • Are employee time records maintained for at least four years?
  • Are employee schedules maintained for at least four years?
  • Do the managers have set forms for the following:
    • Employee discipline and write-ups
    • Documenting employee tardiness
  • How is the employee documentation provided to Human Resources or the appropriate manager?
  • Who is involved in reviewing disability accommodation requests?
  • How are employee absences documented?

3. Wage and Hour Issues

  • Does the company have its workweeks and paydays established?
  • Are paydays within the applicable time limits after the pay period as required under the law?
  • Are employees provided with compliant itemized wage statements?
  • Are employees provided a writing setting out their accrued paid sick leave each pay period?
  • Are employees properly classified as exempt or nonexempt?
    • For exempt employees, review their duties and salary to ensure they meet the legal requirements to be an exempt employee.
  • Any workers classified as independent contractors, and if so, could they be considered employees?
  • Are nonexempt employees properly compensated for all overtime worked?
  • Is off-the-clock work prohibited?
    • Policy in place?
    • Are managers trained about how to recognize it and what disciplinary actions to take if find employees working off-the-clock?
  • Does the company’s time keeping system round employee’s time?
    • If so, is the rounding policy compliant with the law?
  • Are meal and rest period polices set out in handbook and employees routinely reminded of policies?
    • Does the company pay “premium pay” for missed meal and rest breaks? If so, how is this documented on the employee pay stub?
    • Do employees record meal breaks?
    • Are managers trained on how to administer breaks and what actions to take if employees miss meal or rest breaks?
  • Is vacation properly documented and tracked?
  • Are all deductions from the employee’s pay check legally permitted? (use caution, very few deductions are permitted under CA law)
  • Are employees reimbursed for all business expenses, such as uniforms, work equipment and miles driven for work?

 4.End of Employment Issues

  • Are employees leaving the company provided their final wages, including payment for all accrued and unused vacation time?
  • Does the employer deduct any items from an employee’s final paycheck?
    • If so, are the deductions legally permitted?

5. Anti-harassment, discrimination and retaliation

  • Are supervisors provided with sexual harassment training every two years? (If employer has 50 or more employees, supervisors are legally required to have a two-hour harassment prevention training that complies with AB 1825 and amendments to this law).
  • Are supervisors and managers mentioning the open-door policy of the company to employees at routine meetings with employees? Is this being documented?

Please let me know if you have any other items your company considers during review of employment policies – it would be great to update this list to share with readers.  Have a great weekend.

The basics of tipsWelcome to another Friday’s Five. This week is a discussion about issues facing restaurants, hotels, and other industries where tipping and gratuities are left for employees.  This simple concept is surprisingly complex for employers.  Here are five issues employers should understand about tips 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. In the seminal 1990 case on tip-pooling, 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.” However, owners, managers, or supervisors of the business cannot share in the tip pool.  Employers need to be careful to exclude any employees who direct the work of other employees from tip pools, as lead shift supervisors, floor managers, and others who do not have the authority to hire or fire may still be considered a supervisor for tip pooling purposes.

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 bartender
  • 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) When do tip tips left on credit cards have to be paid, and can a deduction made for processing the credit card transaction?

If a patron leaves a tip on their credit card, the employer may not deduct any credit card processing fees from the tip left for the employee. Moreover, tips left using a credit card must be paid to employees no later than the next regular payday following the date the credit card payment was authorized. See Labor Code § 351.

4) Can California employers have back of the house employees share in a tip pool?

No (as of April 2017), but this could change.  The Court in Oregon Restaurant and Lodging Association v. Perez, the Ninth Circuit Court of Appeals, which covers California, held in February 2016 that the Department of Labor’s regulations about who can participate in tip pools applies to states like California which do not permit tip credits.  The DOL has issued regulations that under the FLSA a tip pool is only valid if it includes employees who “customarily and regularly” receive tips, such as waiters, waitresses, bellhops, counter personnel who service customers, bussers and service bartenders.  According to the DOL, a valid tip pool “may not include employees who do not customarily and regularly receive[] tips, such as dishwashers, cooks, chefs, and janitors.”  The Plaintiffs in Oregon Restaurant filed a petition for review to the United State Supreme Court.  The Supreme Court will likely decide whether to hear the case in 2017.  Therefore, until any further clarification from the Supreme Court, it is best that restaurants use caution and not include back of the house employees who are not customarily and regularly tipped in tip pools.

While some states provide the employer with a “tip credit”, California law does not allow this. However, with the recent passage of the increase in California’s minimum wage, there is more discussion of examining whether a tip credit should be considered in California. However, current law does not allow employers to “credit” an employee’s tips towards the minimum wage requirement for each hour worked.

A service charge added to a customer’s bill is not a tip or gratuity and remains the property of the employer.  Therefore, the employer may distribute the service charge to its employees, including back of the house employees as it wishes.  However, if a service charge is distributed to employees, it is considered wages and effects the employee’s regular rate of pay for overtime purposes as discussed below.

5) Do tips change an employee’s 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.

However, if an employer implements mandatory service charges and shares these service charges with employees, the service charges must be considered wages for overtime and tax purposes.  Therefore, the employee’s regular rate of pay for overtime purposes will be higher when mandatory service charges are distributed to the employees.  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.

**Additional issue: Pay attention to other requirements under local ordinances regulating service charges.

For example, Santa Monica’s minimum wage ordinance requires employers to “distribute all Service Charges in their entirety to the Employee(s) who performed services for the customers from whom the Service Charges are collected.”  Santa Monica Municipal Code § 4.62.040.  “Service Charge” is defined as “any separately-designated amount charged and collected by an Employer from customers, that is for service by Employees, or is described in such a way that customers might reasonably believe that the amount is for those services or is otherwise to be paid or payable directly to Employees…under the term ‘service charge,’ ‘table charge,’ porterage charge,’ ‘automatic gratuity charge,’ ‘healthcare surcharge,’ ‘benefits surcharge,’ or similar language.”  Santa Monica Municipal Code § 4.62.010(g).