5 Tips on Tip Pooling  

As the restaurant industry looks towards easing COVID-19 restrictions and a hopeful return to “business as usual”, the following is a refresher on California rules related to tips and tip pooling.

  1. The employee owns the tip.   
    A tip is money a customer leaves for an employee over the amount due for the goods sold or services rendered.  California Labor Code Section 351 provides that “every gratuity is hereby declared to be the sole property of the employee or employees to whom it was paid, given, or left for”.  Thus, tips belong to the employee, not to the employer. 
     
  2. Do not credit tips against wages.
    Unlike under federal regulations, in California an employer cannot use an employee’s tips as a credit towards its obligation to pay the minimum wage. California law requires that employees receive the minimum wage plus any tips left for them by customers.
     
  3. Have clear policy on tip pooling that complies with the California Labor Code.  
    Labor Code Section 351 has been interpreted to allow for both voluntary and involuntary tip pooling so long as the tip pooling policy is not used to compensate the owner(s), manager(s), or supervisor(s) of the business, even if these individuals should provide direct table service to a patron or are in the chain of service to a patron.  In the seminal 1990 case on tip pooling, Leighton v. Old Heidelberg, Ltd., the court stated that a gratuity left for an employee belongs to all the employees “who contributed to the service of that patron.” Subsequent cases have extended Leighton to situations where the employer requires servers to share their tips with restaurant employees who do not provide services directly to the customer’s table but who are in the “chain of service” to guests (e.g., bartenders and dishwashers). In addition, on March 23, 2018, the Consolidated Appropriations Act, 2018 signed by President Trump changed federal law on this issue and allows employers to share tips with back of the house employees.  Therefore, as of March 24, 2018, California employers can include those back-of-house employees who are in the “chain of service,” which would include dishwashers, line cooks, and others who are not supervisors or managers.  

    As to distribution, while the California labor code is silent as to how tips may be distributed, the California Labor Commissioner’s office (also known as the Division of Labor Standards Enforcement (DLSE)) has opined that any tip pooling arrangement must be “fair and reasonable”.  A fair and reasonable distribution of tips will usually be found where an employer has an impartial system for deciding how much is paid to each employee.  Employers need to be careful about including employees who direct the work of other employees in tip pools, as lead shift supervisors, floor managers, and others who do not have the authority to hire or fire may still be considered a supervisor for tip pooling purposes.
     
  4. Timely pay employees their tips that are paid with credit card and do not deduct any credit card processing fees.
    Payment of a gratuity made by a customer using a credit card must be paid to the employee no later than the next regular payday following the date of the credit card payment.  The employer must pay the employee the full amount of the tip that is indicated on the receipt. The employer may not make any deduction for credit card processing fees or costs that are charged to the employer by the credit card company from gratuities paid to the employee.
     
  5. Do not include tips when calculating an employee’s regular rate of pay.
    Overtime and missed meal/rest break premiums are based on the regular rate of pay, which is the compensation an employee earns for work performed.  The regular rate of pay includes a number of different kinds of remuneration, such as hourly earnings, salary, piecework earnings, and commissions; however, tips are not included.  Because tips are voluntarily left by customers to employees, tips do not increase an employee’s regular rate of pay used to calculate overtime rates or missed meal/rest break premiums. It is important to note that if an employer implements mandatory service charges and shares these service charges with employees, the service charges must be considered wages for overtime and tax purposes.  Therefore, the employee’s regular rate of pay for overtime or missed meal/rest break premium purposes will be higher when mandatory service charges are distributed to the employees


If you have any questions about tips, tip pooling, or calculating the regular rate of pay, please contact Ghazaleh Modarresi at ghazaleh.modarresi@berliner.com or any of the Berliner Cohen employment law attorneys.