Tip Pooling – Is It Legal in California?

Posted on May 27, 2021

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 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 However, an employer’s agent 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,
• compensate other workers who contribute to the chain of service but who do not directly interact with customers or provide direct table service, like table bussers, busboys, or kitchen staff at a restaurant, or
• lighten the strain of the workday.

California employers can have mandatory tip pooling arrangements among its 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.

When the tip was made in cash, employees can receive them immediately.⁸

When the tip was made with a credit or debit card, 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

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. 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.¹⁴ It would come in the form of a different type of benefit or compensation.

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

Employees who think that their employer is keeping tips or illegally interfering in their tipping pool can:

• file a complaint with the Labor Commissioner’s Office or the California Division of Labor Standards Enforcement,
• bring a lawsuit under the Private Attorneys General Act, also known as a PAGA claim,
• file a lawsuit under California’s Unfair Competition Law for a fraudulent business practice, or
• file a lawsuit against their employer for conversion, or unlawfully interfering with the property of the employee.

An employment attorney from a local law firm can help employees recover what they deserve.

About the Author

Behzad Mirbagheri