Tip pooling is legal in California so long as tips are not split among managers who have the authority to hire or fire employees, unless those managers do the same work as the employees in the tip pool. Funds in the tip pool have to be distributed fairly and according to a set formula.
What are the tip pooling laws in California?
Tip pooling is legal in California, so long as certain conditions are met.
A tip pool is a fund that is comprised of some or all of the tips that have been earned by multiple employees. The fund is then distributed in a fair and reasonable way to those employees according to an agreed-upon formula and established tip pooling policies.
To be legal under California law, these tip pools have to:
- consist of employees,
- be funded with tips that were given to those employees, and
- exclude the employer, or any agent of the employer, from receiving tips from the fund.1
The employer is the employee’s boss.2 An agent of the employer is anyone who can hire or fire the employee, or who can supervise, direct, or control what the employee does on the job.3
Can a manager accept tips in California?
Managers cannot keep tips given to employees. But an employer’s agent – such as a manager – may benefit from a storewide tipping pool if the agent is left a tip by a customer and has the same tasks as non-agent employees.4
For example: A coffee shop in Los Angeles has a mandatory tip pool. Money left in the tip jar is distributed to employees and shift supervisors every week according to a formula. Shift supervisors are agents of the employer because they control what other employees do on the job. However, they also work as baristas during their shifts. These shift supervisors may benefit from the collective tip jar.5
Tip pools can be used by service employees who want to:
- offset the differences between working shifts that are during peak and off hours,
- reduce competition at work, or
- lighten the strain of the workday.
Can an employer require tip pooling?
California employers can have mandatory tip pooling arrangements among their employees without violating the state’s labor laws.6 However, employers cannot deduct hourly wages from their tipped employees based on the amount of gratuity that the worker has received – often known as a “tip credit.”7
This state law provides greater protections for workers in California than those afforded by federal law, like the Fair Labor Standards Act (FLSA) or the U.S. Department of Labor (DOL). It ensures that service workers in California receive at least the state’s minimum wage. (Currently, California’s minimum wage is $14.00 an hour at companies with more than 25 employees, and $13.00 an hour at other companies.)
How soon can staff take home their tips?
When a customer leaves tips in cash, employees can receive them immediately.8
When the tip was made with a credit card payment or debit card payment, the employee is entitled to the full amount of the tip on the next regular payday. If the credit card company imposes any credit card processing fees, the employer is not allowed to deduct those from the employee’s tip.9 The employer also has a legal responsibility to keep records of any of these tips and make the records available to the California Labor Commissioner’s Office.10
What is considered a tip?
Under California employment law, a valid tip is a form of gratuity that is voluntarily left for an employee by a customer and that is over and above the cost of what the customer bought.11 Tips are the sole property of the employee.12
This means that tips are not technically a part of the employee’s wages. However, they do still have to be reported as taxable income to the IRS by the person receiving them. Because they are not wages, though, the money that a worker earns in tips will not impact their overtime rate because they do not change the worker’s regular rate of pay.13
Employees that typically receive tips include:
- waiters and bussers/busboys
- valet attendants
- housekeeping staff
- delivery people
- spa and salon workers
Mandatory “service charges” are not tips in California because they are not voluntarily given by the customer. These service charges are sometimes imposed on patrons by employers. These charges also go to the employer, who then has discretion in how they are distributed. (Note that certain municipalities require service charges to go to the employee directly.)
If proceeds from mandatory service charges do end up being paid to the employee, it would not be paid in the form of a tip or gratuity. Employers would have to withhold Social Security and Medicare (FICA) tax on service charges. And unlike tips, service charges can count towards minimum wages and how overtime is calculated.
“Double tipping” – where employees receive both tips as well as service charges – is legal in California.14
What are the penalties for a tip or gratuity violation?
Employers who violate California’s tip and gratuity sections of the state’s wage and hour laws are guilty of a misdemeanor offense. Penalties include:
- a fine of up to $1,000,
- up to 60 days in jail, and
- restitution for the employee for the tips that were taken.15
How can workers fight back if they do not get their tips?
Employees who believe that their employer is keeping tips or illegally interfering in their tipping pool can file a wage claim complaint with the Labor Commissioner’s Office (the California Division of Labor Standards Enforcement (DLSE)). This will trigger an agency investigation.
The case will then either be:
- referred to a conference (to determine if a hearing is necessary),
- referred to a hearing (where the parties testify under oath and be recorded), and/or
If there is a hearing, afterwards the Labor Commissioner will serve an ODA (Order, Decision, or Award).
The ODA can be appealed, which will then trigger a traditional civil trial. Note that the DLSE can represent employees who cannot afford counsel. If the employee wins the trial, the court will enter a judgment against employers who refuse to pay.
Alternatively, employees who are being deprived of tips can:
- Bring a lawsuit for civil penalties under the Private Attorneys General Act, also known as a PAGA claim. This is a multi-step process, and the statute of limitations is one year from the non-payment of tips.
- File a lawsuit under California’s Unfair Competition Law (UCL) for a fraudulent business practice, including violating the California Labor Code. The statute of limitations is four years after non-payment of tips.
- File a lawsuit against the employer for conversion, which is unlawfully interfering with the property of the employee. The statute of limitations is three years after the non-payment of tips.
- File a lawsuit for breach of contract. The statute of limitations is two years after non-payment for oral contracts, and four years after non-payment for written contracts.
An employment attorney from a local law firm can help employees recover the damages that they deserve. And if the employee no longer works for the employee, the attorney can help the employee recover a waiting time penalty.
Employers are prohibited from retaliating against employees who ask for their tips or bring a legal action to recover their tips. (Retaliation includes firing, demoting, punishing, or otherwise mistreating.) If an employer retaliates, the employee can file a discrimination/retaliation complaint with the Labor Commissioner’s Office or else file suit.16
What is the difference between tip pooling and tip sharing?
Tip pooling is when employees “in the chain of service” combine their tips, and only these employees receive a portion of the tip pool. Tip sharing is when tipped employees give a percentage of their tips to back of the house staff who do not get tips, such as kitchen staff, dishwashers, cashiers, cooks, and janitors.
- California Labor Code section 351 LAB and Budrow v. Dave & Buster’s of California, Inc., (2009) 171 Cal.App.4th 875. See also Etheridge v. Reins Internat. California, Inc. (2009) 172 Cal.App.4th 908. See, e.g., Santa Monica Municipal Code, § 4.62.040. See also Industrial Wage Commission Wage Orders 5-2001 and 10-2001.
- California Labor Code 350(a) LAB.
- California Labor Code 350(d) LAB.
- Chau v. Starbucks Corp., (2009) 174 Cal.App.4th 688.
- Leighton v. Old Heidelberg, Ltd., (1990) 219 Cal.App.3d 1062.
- California Labor Code 351 LAB. See, e.g., Kilgore v. Outback Steakhouse (6th Cir. 1998) 160 F.3d 294, 298. See, e.g., People v. Los Angeles Palm, Inc. (1981) 121 Cal.App.3d 25.
- California Labor Code 353 LAB.
- California Labor Code 350(e) LAB.
- California Labor Code 351 LAB.
- California Labor Code 510(a) LAB. 26 U.S.C. § 3121(a)(12), (q). See also Industrial Welfare Com. v. Superior Court of Kern County (1980) 27 Cal.3d 690.
- Searle v. Wyndham International, (2002) 102 Cal.App.4th 1327. See, e.g., Santa Monica Municipal Code, § 4.62.040.
- California Labor Code 354 LAB. See also Application Group v. Hunter Group (1998) 61 Cal.App.4th 881. See also People v. Los Angeles Palm, Inc. (1981) 121 Cal.App.3d 25. See also Lu v. Hawaiian Gardens Casino, Inc. (2010) 50 Cal.4th 592.
- California Labor Code 98.6, 355, 2698-2699.5 LAB; Business and Professional Code 17200, 17204 & 17208; California Code of Civil Procedure 337, 338, 339, 340. Amaral v. Cintas Corp. No. 2 (2008) 163 Cal.App.4th 1157, 1199. California Civil Jury Instructions, No. 2100, Conversion.