California labor code: a guide to California tip laws

Though waitstaff rely on tips for a significant portion of their income, many may be unaware of the laws surrounding tipping, or the difference between a tip, a gratuity, and a service charge. Without this information, these workers may be unwitting victims of California labor law violations.

What is a gratuity?

A gratuity is an extra amount of money amount paid to an employee on top of their regular wages. Gratuities may be given voluntarily by customers, or they may be included in the cost of the service. Gratuities are often referred to as tips, although they may be automatically added on to the cost of a bill, similar to a service charge. In these cases, a bill will typically state that the gratuity has already been included.

Tip vs. service charge

A tip is an amount voluntarily left by a customer on a bill. Tips are not meant as part of the payment for the bill and are instead an extra sum given to the person or people who provided the service. In contrast, a service charge is a charge included in the bill and is mandatory. While customers may choose whether they want to leave a tip at all, in addition to the amount of the tip, service charges are a set price and are included in the cost of the bill.

Are mandatory service charges tips?

A mandatory service charge is not a tip. A tip is a gratuity that is voluntarily left by the paying customer. A service charge is a mandatory fee charged by the employer to the customer, according to the Society for Human Resource Management (SHRM).

According to the federal law, particularly the Fair Labor Standards Act, and the California Labor Code, an employer who distributes the service charge to his employees and treats it as a tip will be in violation of California labor laws for not correctly calculating wage amounts and taxes and for failing to report the wages appropriately.

California cities including Santa Monica, Berkeley, and Emeryville require businesses to distribute mandatory service charges to the employees who performed the work that earned the service charge. Such a service charge would be included as the worker’s regular rate of pay. The SHRM says a business that distributes service charges among its employees should have a written policy that explains how that is done.

Some restaurant managers may offer an incentive to servers who successfully sell a certain dish on a particular day. For example, a steak restaurant might offer a $3 incentive for every surf and turf special sold in an evening. Such payments should be included in the worker’s regular rate of pay and not calculated as tips.

When an employee works overtime, the overtime wages are based on the regular rate of pay, which includes nondiscretionary income such as the employee’s portion of any service charges collected. In California, daily overtime is owed to an employee who works more than eight hours in one day. California law dictates an employee must be paid time and a half for more than eight hours worked in a single day, but double time for additional time after 12 hours.

California tip law

California tip law governs the ways that tips may be collected and shared by employees. According to California tip laws, employees are entitled to the entirety of the tips left for them by customers. Employers and managers are prohibited from taking a cut of these tips for themselves. They are also prohibited from deducting tip amounts from employee wages or using tips to pay employee wages. Tips that are left electronically rather than in cash must also be given to employees in their full amount. Employers are not allowed to deduct credit card fees from these tips before passing them on to employees.

Many service workers rely on tips to make ends meet. Even so, the poverty rate for tipped workers is much higher than for non-tipped workers. While in states like California, which requires the same minimum wage for tipped workers as non-tipped workers, the poverty rate for tipped workers is lower than in other states, according to the Economic Policy Institute. However, a higher percentage of tipped workers are in poverty than non-tipped workers.

Is deducting tips from paychecks illegal?

In California, deducting tips from paychecks is illegal. Employers are required to pay tips to employees by the next scheduled payday and are not allowed to factor these tips into employer calculations for wages or overtime pay.

There are plenty of states, however, in which employers are merely required to pay tipped employees a minimum cash wage—which, notably, is also the federal standard, though many states have increased the minimum cash wage above the federal $2.13.

Is California tip pooling legal?

Tip pooling, or the collecting of all tips given to employees and then distributing them evenly, is allowed under California tip laws. Often, tip pooling is used to provide workers who do not have customer contact to receive tips. In the restaurant industry, tips that are collected by servers may be pooled and distributed among waitstaff and other workers including hosts, busboys, and bartenders. However, managers and other agents of the employer may not participate in tip pooling.

Who qualifies to receive tips from tip pools?

Employers who are not managers or “agents of the employer” are qualified to take part in tip pools. Generally, an employee is considered to be an agent of the employer if they have the title of manager, or are responsible for supervising one or more employees, setting shift schedules, disciplining other workers, or making hiring and firing decisions.

However, California tip laws do not explicitly define who qualifies as a manager or supervisor. Some employers may be taking advantage of the law’s vagueness in order to include managers and supervisors in employee tip pools. In some cases, the position of “manager” or “shift supervisor” may be little more than a title. If these workers do not supervise other employees, make hiring or firing decisions, or discipline employees, they may functionally be employees, rather than agents of their employer.

Additionally, these workers are usually required to be in the chain of service that collects the tips in order to participate in tip pooling. For instance, busboys may be eligible to participate in a tip pool because although they do not provide table service to customers, they are still in the chain of service. In contrast, a security guard working at the same restaurant would likely not be eligible to participate in tip pooling.

Filing a wage claim

If you believe that your employer is violating California tip laws by withholding your tips, taking a credit card fee percentage out of electronic tips, using tips to supplement your wages, or giving tips to employees who have managerial duties, you may be eligible to file a wage claim against your employer. Victims of wage or tip theft may be able to speak to an experienced wage and hour attorney to determine whether they have a case.

What if your employer retaliates?

Some employees who believe their employer may be inappropriately distributing or withholding tips may be reluctant to come forward, due to the belief that their employer may retaliate against them for speaking up. California law prohibits employers from retaliating against their employees for speaking up about wage violations. California employees who are fired or have their hours reduced after filing a tip or wage complaint may be able to sue for wrongful termination. Employees who are harassed by their employers or are passed over for promotions due to their complaints may also have legal rights.

Victims of California wage and hour violations may be eligible to open an investigation into their employer or file a class action lawsuit against them. In some cases, victims may be able to recover financial reimbursement for lost tips or wages, in addition to punitive damages.

A growing number of California workers are coming forward with allegations of labor law violations. Wage and hour lawsuits in California often end up reaching settlement agreements prior to going to trial in the first place, sometimes amounting to millions in compensation.

Under California law, workers have between two and three years to report labor law violations. As always, the earlier a lawsuit is filed, the better.

Filing a lawsuit can be a daunting prospect, especially while dealing with the financial instability of these kinds of labor violations and retaliation concerns, so Top Class Actions has laid the groundwork by connecting you with an experienced attorney. Consulting an attorney can help you determine if you have a claim, navigate the complexities of litigation, and maximize your potential compensation.

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If you were forced to work off the clock or without overtime pay within the past 3 years in California, you have rights – and you don’t have to take on the company alone.