Is Your Employer’s Tip Policy Legal?

California’s Tip Law

By Cindy Pham

California law is very specific regarding gratuities left employees. It 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”. This means that an employer must pay the employee the full amount of the tip that is left for that employee. This also means that the employer is prohibited from sharing in or keeping any portion of a gratuity left for an employee by a patron. Additionally, an employer cannot credit an employee’s tips against the money it owes the employee. That is because tips are considered “voluntarily” left by a patron for an employee. On the other hand, a “service charge,” that is placed on a bill is not considered “tips,” if they are mandatory and not waivable by the customer. However, if the charge is negotiable or is simply added as a matter of convenience (e.g. “18% gratuity policy for large parties), it is still considered a tip even if it is automatically added. When a tip is left by credit card, it is illegal for an employer to charge any type of credit card processing fee or “accounting fee”. California requires that the employer give the employee the full tip left by the customer and pay the entire credit card processing fee itself.

Tip Pooling

While the concept of tip pooling may not be familiar to many, it is a widespread practice in the service industry, wherein some of the tips received by tipped employees are shared with other employees at the business. In one type of tip pool, the pool is designed to spread the risk of low tipping patrons among all tipped employees and only tipped employees may participate in tip pools; in another type of tip pool, the pools are designed to share tips with non-tipped employees who are considered deserving of tips, but who, for some reason are generally not tipped by patrons (e.g., compare a server v. dishwasher). Mandatory tip pools are legal in the general sense. However, it has been a subject of dispute amount the courts as to which employees may share in the tip pool.

In 2011, the Department of Labor enacted regulations, providing that only employees who customarily and regularly receive tips can share in tip pooling arrangements. Regardless of the employee’s job title, an employee “customarily and regularly” receives tips if he or she: (1) has more than de minimis interaction with the customers who leave the tips, and (2) is engaged in customer service functions. See Montano v. Montrose Restaurant, 800 F.3d 186, 191 (5th Cir. 2015). Since then, the district courts in Oregon (See Or. Rest. &Lodging v. Solis, 948 F. Supp. 2d 1217, 1218 (D. Or. 2013) and Nevada (See Cesarz v. Wynn Las Vegas, LLC, No. 2:13-cv-00109-RCJ-CWH, 2014 U.S, Dist. LEXIS 3094, 2014 WL 117579, at *3 (D. Nev. Jan. 10, 2014)) have attempted to invalidate the DOL’s regulations, by concluding that the 2011 regulations enacted by the DOL are invalid and contrary to Congress’ clear intent.

Recently, however, in February of this past year, the 9th U.S. Court of Appeal in San Francisco in the matter of Oregon Restaurant & Lodging Assoc. v. Perez, — F.3d –, No. 13-25765 (9th Cir. Feb. 23, 2016) issued a decision overruling the decisions of the Oregon and Nevada district courts and upholding the DOL regulations which the Court of Appeal maintains, “is more closely aligned with Congressional intent”.

Unless this decision fails to survive further court challenges, California employers will need to make sure that its current tip pooling arrangements are aligned with the DOL regulations, which prevent tip pools that involve employees whom do not customarily receive tips (e.g., cooks, bussers dishwashers, and kitchen staff). If you believe that your employer’s tip-pooling arrangement is unfair in any way, or that your tips are being shared with other employees who should not be receiving them, contact an attorney to discuss your rights.