I. Introduction
California’s laws about tips are found in the Labor Code. [1] Under these tip laws, a tip or gratuity is defined as “any tip, gratuity, money, or part thereof that has been paid or given to or left for an employee by a patron of a business over and above the actual amount due the business for services rendered or for goods, food, drink, or articles sold or served to the patron.” [2] This article discusses tips in depth, including how the California tip laws relate to minimum wage, mandatory service charges, overtime pay, tip pooling, and tips paid by credit card. Tipped employees and their employers should be aware of their rights and responsibilities, respectively, under the California tip laws.
II. Employers May Not Credit Tips Toward Minimum Wage
Unlike federal law [3] and most other state laws, California law prohibits an employer from using a tip credit to meet its minimum wage obligation. Further, California Labor Code § 351 prohibits an employer from keeping any portion of a tip that a customer leaves for employees. In California, tips belong to the employee and not to the employer. [4]
For this reason, California employers may not claim a credit against their minimum wage obligation by counting tips that an employee may receive toward the employee’s minimum wage. In other words, an employer must pay tipped employees the minimum wage in addition to any money that an employee earns in tips. [5]
III. Mandatory Service Charges
Sometimes, a restaurant or hotel charges its customers a mandatory service fee. Distinguishing between “tips” and “mandatory service charges” is important. A recent California Supreme Court decision discusses the distinction between a tip and a mandatory service charge:
A “gratuity” is “any tip, gratuity, money, or part thereof that has been paid or given to or left for an employee by a patron of a business over and above the actual amount due the business for services rendered or for goods, food, drink, or articles sold or served to the patron….” A gratuity is not a service charge. A service charge is a separately designated amount collected by a hotel from patrons that is part of the amount due the hotel for services rendered, rather than something “over and above the amount due.” Thus, a service charge, by definition, is not a gratuity. The Legislature has made clear that amounts due for services (which include service charges) are not gratuities. [6]
Typically, a tip belongs to the employee, and a mandatory service charge belongs to the employer. But not always. An employer may be required to pay a mandatory service charge to its employees because of the context or because of local law.
A. The Service Charge in Context
Generally, a mandatory service charge is not a tip for purposes of California Labor Code § 351. “Because the service charge is mandatory and because the hotel is free to do with the charge it as it pleases, the service charge is simply not a gratuity which is subject to the discretion of the individual patron.” [7] “[A]mounts due for services (which include service charges) are not gratuities.” [8]
However, when considered in context, a service charge “may be considered a ‘gratuity’ (tip) under Labor Code section 350 or not depending upon whether the specific facts show the charge is perceived and intended by a customer to be a gratuity.” [9] In other words, the courts look at the mandatory service charge in context, including what customers think the service charge was meant for, how the contracts between the customer and business describe the charge, and the industry customs and practices. [10] “[C]ustom or usage can serve as a common law augmentation of [California Labor Code] sections 350 and 351.” [11]
B. Service Charge Distribution May Be Subject to Local Ordinances
If a mandatory service charge is not considered a tip in context as discussed above, the employer can decide whether to share the service charge with its employees. [12] That said, employers may not have discretion over whether to distribute a mandatory service charge if a local ordinance requires it.
Around 40 local California governments have ordinances on minimum wage. [13] Some of these local ordinances require employers to pay service charges to the employees. For example, Santa Monica, Berkeley, and Anaheim all have municipal codes that require employers to pay service charges to their employees. [14]
IV. Overtime Calculations
The distinction between a tip and a service charge is also important in relation to calculating an employee’s overtime pay. An employer uses the employee’s “regular rate of pay” to calculate their overtime wages. [15] A service charge paid to an employee is included in the regular rate of pay; a tip is not.
A. Service Charges May Be Included in Regular Rate of Pay
If an employer chooses to pay employees from its mandatory service charges, this amount is included as part of the employee’s regular rate of pay, which is the amount used to calculate the employee’s overtime rate for a pay period.
[A]n employee’s “regular rate of pay” for purposes of Labor Code section 510 and the IWC wage orders is not the same as the employee’s straight time rate (i.e., his or her normal hourly wage rate). Regular rate of pay, which can change from pay period to pay period, includes adjustments to the straight time rate, reflecting, among other things, shift differentials and the per-hour value of any nonhourly compensation the employee has earned. [16]
If an employee’s straight time pay is minimum wage and the employer also pays the employee an amount from its service charges, the employee’s overtime rate must be 1.5 times the minimum wage as adjusted to include the service charge amounts the employer paid.
B. Tips Are Not Included in Regular Rate of Pay
On the other hand, tips are not included in the regular rate of pay when calculating overtime wages. The California Supreme Court recognizes tips as a nonwage benefit to employees because “tips are paid by customers, not the employer.” [17] The Labor Commissioner further explains that since tips are voluntarily left for employees by customers and are not paid by employers, they are not considered part of an employee’s regular pay rate when calculating overtime. [18] So, if an employee’s pay rate is minimum wage and the employee also earns tips, then the employee’s overtime rate is 1.5 times the minimum wage—and the tips are not calculated as part of the hourly rate for overtime purposes.
V. Tip Pooling
Tip pooling is the practice of combining and then distributing tips among employees—usually at certain percentages—who “directly provide service to the tipping patron.” [19] “California has no established policy against tip pooling among employees mandated by the employer.” [20] But tip pooling must meet certain requirements to be legal.
“Every gratuity is hereby declared to be the sole property of the employee or employees to whom it was paid, given, or left for.” [21] While California Labor Code § 351 prohibits an employer or agent from collecting, taking, or receiving a gratuity that a patron leaves for an employee, “[t]he fact that an employer requires a server to pool tips with other service employees who do not hire, fire, supervise or control their co-workers does not constitute a ‘taking’ as that term is used in § 351.” [22] Further, the pool may include “employees who do not provide direct table service, but participate in the chain of service” such as dishwashers and kitchen staff. [23]
Under the law, tip pooling may not include the “employer or agent.” [24] The law defines “agent” as “every person other than the employer having the authority to hire or discharge any employee or supervise, direct, or control the acts of employees.” [25] But at least one court has carved out an exception to the rule against including “agents” in tip pooling, holding that a supervisor who spends 90% of their time performing the same tasks as a barista may be included in a tip pool paid from the countertop tip jar. [26]
VI. Special Rules for Tips Left by Credit Card
Oftentimes, customers add a tip for employees to their credit card payments. The Labor Code specifically addresses this situation in two ways.
A. Employers Must Pay the Entire Amount of a Credit Card Tip
When a customer pays a bill or guest check with a credit card and includes a tip for the server or other employee, California Labor Code § 351 specifically states that the employer must pay the employee the full tip amount as indicated by the customer on the credit card pay slip. The same Code section prohibits employers from deducting any credit card payment processing fees or costs that the credit card company may charge to the employer. [27]
B. Employers Must Pay Credit Card Tips on Time
Further, California Labor Code § 351 requires an employer to pay its employees all credit card tips by the next regular payday after the guest or patron makes the credit card payment. [28]
VII. Employee Remedies; Employer Penalties
If an employer credits tips against an employee’s wages or otherwise fails to properly pay the employee, the employee can file a wage claim with the Division of Labor Standards Enforcement. “The Department of Industrial Relations shall enforce the provisions of this article.” [29] In the case of a final paycheck, an employer may be required to pay a waiting-time penalty in addition to back wages. [30] Further, the tip laws provide for civil penalties against employers—paid to the state—and even imprisonment. [31]
VIII. Conclusion
California law protects tipped employees in several ways. In California, employers must pay tipped employees the full minimum wage in addition to any tips they earn. Although tips are not included when calculating an employee’s overtime rate, any mandatory services charges the employer chooses to pay to the employee are included in the calculation. While the Labor Code considers tips to be the employee’s property, it does permit tip-pooling if management and ownership are not included in the distribution. Finally, employers must pay employees their tips left by credit card in full and in a timely way.