Before I became an attorney and started to practice employment law, I worked as a waiter at various restaurants in San Francisco, California. Having spent 8 years in the food and beverage industry, I know that for many people tips are the primary source of income. The practice of tipping is a well-accepted part of our daily lives. California law and courts have long recognized that by voluntarily leaving tips, the customers reward  the wait staff for good service and an employer has no right to take the tip. Employers often forget this simple rule and unlawfully collect tips from employees. This article is intended to educate my former colleagues and restaurant business owners about California tips law.

1) A gratuity is the sole property of the employee.

To protect employee’s tips, the California Legislature enacted section 351 of the Labor Code. The section prohibits employers and their agents from collecting, taking, or receiving any portion of a gratuity given to or left for an employee by a customer.

Section 351 of the Labor Code makes it clear that gratuities are the sole property of the employee or employees to whom they are given. Henning v. Industrial Welfare Commission, 1988.  The term gratuity is defined to include “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) Employer may not deduct the cost of credit card transaction from gratuities.
For every credit card transaction, employers pay a certain percentage to credit card companies (e.g. Visa, MasterCard or Amex). Because this percentage also applies to the gratuities charged, the employer never receives the full amount owed and paid by the customer. Section 351 prohibits any deductions for any credit card payment processing fees or costs that may be charged to the employer by the credit card company. Therefore, if an employer permits customers to pay gratuities by credit card, he or she must pay the employees the full amount of the gratuity that the customer indicated on the credit card slip.

Payment of gratuities made by patrons using credit cards shall be made to the employees not later than the next regular payday following the date the patron authorized the credit card payment.

3) CA employers may not credit tips against wages to meet the requirements of minimum wage laws.

California law does not allow a tip credit. For example, section 351 expressly prohibits employers from crediting any part of a gratuity against the wages. Almost all employers who are covered under both state and federal law must pay tipped employees the full minimum wage regardless of how much money employees earn in tips. Employers who credit tips to satisfy the minimum wage requirement are violating the unfair competition law. Henning v. Industrial Welfare Comm’n (1988) People v. Los Angeles Palm, Inc. (1981)

4) Employers are allowed to impose a mandatory tip pooling policy.

A wait staff may voluntarily agree among themselves to pool or share tips. The same is true for involuntary tip pooling policies imposed by employers. According to California case law, a gratuity left for an employee belongs to all of the employees “who directly contributed to the service of the customer.”

California courts have long recognized employers’ right to exercise control over business to ensure an equitable sharing of gratuities among those who directly involved in providing services to the customers. A fair distribution of the gratuities promotes peace among employees and improves service to the public. Leighton v. Old Heidelberg, Ltd. (1990).  The Division of Labor Standards Enforcement of California subscribes to the same rule and allows employers to impose a mandatory tip sharing policy. (Wage and Hour Opinion Letter No. 1728).

5) Employers may require waiters to share tips with kitchen staff.

A mandatory tip pooling rule also applies to those who do not provide services directly to the customer’s table. For example, an employer may require servers to share their tips with kitchen staff, dishwashers, and bartenders, none of whom provide direct table service to patrons. Etheridge v. Reins Internat. California, Inc, (2009).  Section 351 does not distinguish between the various functions that restaurant employees perform.  There are only two conditions created by section 351: (1) the person must be an employee and (2) the tip must have been “paid, given or left for” the employee. Budrow v. Dave & Buster’s of California, Inc, (2009)

6) A floor manager who has authority to fire and hire may not share tips with staff.

If a restaurant floor manager or supervisor has the authority to hire servers without the consent of the owners and also has the power to supervise and discipline the servers, such manager is considered to be  an agent of the restaurant within the meaning of Labor Code § 350 and may not require waiters to share tips with him or her (even thought the manager assisted in serving customers) Jameson v. Five Feet Restaurant, Inc. (2003).

7) A mandatory tip pooling with  managers who have no authority to hire or fire is legal.

In another case, California court has held that the  tips of a casino’s dealers could be shared with the casino’s floor managers because the floor managers were not agents under Section 351. The court explained that while the floor managers had some authority over the dealers, the floor managers’ principal responsibility was to ensure the games ran smoothly. Managers did not have the authority to hire or discharge dealers and they did not supervise, direct, or control the acts of the dealers. Grodensky v. Artichoke Joe’s Casino (2009).

8) A shift-supervisor who provides services to customers is allowed to be part of a tip allocation arrangement.  

Many fast-food restaurants and coffee shops, including Starbucks, have implemented a tip allocation (or apportionment) plan where all tips are collected in a common fund and shared at the end of each week based on the time worked by each employee. In  Chau vs.  Starbucks (2009), the court had to decide whether the Starbucks’ shift manager could be a part of such tip sharing arrangement. The court held that even though the Starbuck’s shift supervisors were agents for purposes of section 351, it was legal for supervisors to share tips because (1) they spent 90-95% of their time doing the same work as baristas and (2) by leaving tips in a tip jar, customers expected the entire crew of baristas to share the tips, including the supervisors.

Employers must be careful when it comes to a tip allocation plan, because only tips placed in a collective tip jar could be shared among workers. Tips intended for a specific employee cannot be shared by others. What is important here is the customer’s intent. Section 351 does not permit the misappropriation of gratuities intended for a certain employee or employees.

9) Mandatory Service charges are not “gratuities” and belong to employers.

As of 1989, the California Division of Labor Standard Enforcement adopted a position that a mandatory service charge is not a gratuity and belongs to an employer. A mandatory service charge  is a part of the amount due for services rendered or for goods, food or drink.  Accordingly, Section 351, which makes gratuities the sole property of the employees for whom they are left, does not apply to service charges and employers are not required to pass them to wait staff.  D.L.S.E. Management Memo 89-2. See also, Garcia v. Four Points Sheraton LAX (2010).

California courts have not yet reviewed whether a 15-20% gratuity added on parties of five and more is subject to section 351. Plaintiff’s attorneys may argue that such gratuity belongs to an employee, because it is generally added to a bill to protect employees from being stiffed by  foreign customers. In addition, when the customers pay a mandatory 15-20% gratuity, they usually intent and expect the sum to be passed on to a waiter.

10) Allowing Employees to take Double Tips is Legal.

Employers may add a service charge to customer’s bill and allow waiters to take additional tips.

In one California case, a guest sued a hotel alleging that double tipping violated the unfair competition law. The guest argued that adding a 17 percent service charge on all room service delivers, passing the charge to the server and then allowing this server to take an additional tip was an unlawful practice. The court disagreed with the guest and held that that a service charge added to a room service bill was the property of the hotel, and the hotel was free to do with it whatever it wished. The hotel could keep it or give it away to a server.  The service charge is not a gratuity and is  not subject to the discretion of the individual patron.  Searle v. Wyndham Int’l, Inc. (2002).

No private cause of action under Labor Code section 351.

Employees who have been victims of a tip abuse should keep in mind that section 351 does not provide for a private cause of action to recover any misappropriated tips from employers, which means that aggrieved employees may not sue their boss in court for violations of section 351 of the Code. Lu v. Hawaiian Gardens Casino, Inc. (2010). However, wronged employees may file a complaint with the Labor Commissioner’s office that has the authority to investigate the alleged violations. In addition, employees may retain an employment law attorney who can recover wrongfully withheld tips under alternative legal theories, including common law conversion, unlawful business practices and the Private Attorney General Act.

Legal Assistance and Free Case Evaluation

If you have questions about this article or other employment-law-related issues, feel free to contact me. I am a San Francisco employment law attorney and will be glad to answer your questions.

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