Here's a Tip: Know the Law About Tips!

California treats customer tips (or “gratuities”) far differently than federal law. Many states, for example, permit employers to take a federal “tip credit” toward minimum wage – lowering tipped employees’ actual hourly wage well below the federal minimum. Tip credits are illegal in California; all employers must pay the state minimum wage whether an employee receives tips or not.

Employer treatment of tips has become a hot topic for lawyers, who have filed many recent class actions alleging violation of state gratuity laws.

Tips Belong to Employees

State law makes clear that tips belong only to employees, not their employers. California Labor Code section 350 states that a gratuity is “the sole property of the employee or employees for whom it was paid, given or left for." This means that employers may not keep any part of a tip for themselves, even to cover administrative or credit-card fees.

While employers may enforce a tip-pooling arrangement initially approved by employees, any system must be “fair,” reasonable and consistent with industry practice. California does not just prohibit owners from keeping tips or participating in a tip pool. Any employee with supervisory duties is prohibited from participating as well. Managers, supervisors, and low-level shift leaders are prohibited from taking any part of customer gratuities – even a share of the “tip jar” at a coffee counter. These employees need not even be exempt from overtime; Starbucks faced a $100M class action alleging that shift supervisors had taken a share of tips despite a prior suit alleging that the same workers were not sufficiently high-level to be exempt management employees. An appellate court overturned the nine-figure (!) award in that case, but it highlights the risks posed by gratuities.

Recent Changes to Tip Pooling Law

Tip pooling was even more limited under Labor Commissioner opinion letters suggesting that only employees actually engaged in the direct “chain of service” could share tips. This prohibited tip-sharing with chefs, kitchen staff, some bussers, bartenders, and other employees despite their contribution to the overall customer experience. The policy was based on language in an older California tip-pooling case that had suggested the “chain of service” language.

In recent years, state courts have rejected the “chain of service” language, arguing

that it does not appear anywhere within California’s Labor Code. This suggests that one basis for many recent actions – sharing tips with co-employees such as bartenders and runners – will soon be discredited. Federal authorities also moved in this direction but may not continue under the current Administration.

Management Options

Employers should be aware of state-law restrictions on tip pooling and monitor developments in the coming months. General rules can be viewed on the Labor Commissioner’s website at http://www.dir.ca.gov/dlse/faq_tipsandgratutities.htm.

Management should also review the status of "service charges" added to bills, a practice commonly applied to larger parties. Some establishments have turned entirely to service charges and discouraged gratuities on the belief that service charges do not count as “tips” under state law. This has been questioned in at least one recent appellate opinion (see the opinion here) and is likely to evolve based on employee and customer assumptions that charges will be split among servers.

Finally, businesses enforcing a tip-pooling policy should be certain that the system truly complies with applicable law and excludes all managers, assistant managers and shift leads. It makes no sense for employers to accept liability for allocating money that was never theirs in the first place.

Don't Forget New-Hire Notices

California employers with nonexempt employees – including any employees who are not exempt from overtime whether paid hourly, on a piece rate, or in any other manner – must remember to comply with California Labor Code section 2810.5. This law requires employers to provide non-exempt hires a written notice describing their basic wage arrangement, which may not change without further advance notice. The notice must provide additional specific information, such as workers compensation data, plus any other information deemed "material" by the state Labor Commissioner.

This form will always be among the first items provided to every new nonexempt employee.

California's Division of Labor Standards Enforcement (the "DLSE" or "the Labor Commissioner") maintains a template for employer use. Use this form with caution: it includes items specifically required by Section 2810.5 plus various other items such as business form (e.g., "corporation" or "sole proprietor") and co-employer information.

The DLSE form is available here, and Frequently Asked Questions are published here.

Note: The Labor Commissioner maintains that all information on its form must be included on any employer-drafted form. The law gives this right to the DLSE but, as has been common with that agency, it did not follow the state's Administrative Procedure Act (which allows employers and other interested parties to comment before new rules are adopted) prior to including additional information on its form. It remains open to question whether the additional requirements are legally binding (but most employers choose to include all requirements anyway).

According to the DLSE, a notice may be given “reasonably close in time” to the “inception of the employment relationship.” This appears to mean that the notice could be given slightly before an employee’s first workday (for example, with an offer letter), or even a few days after the employee begins working. Second, the agency notes (but then waffles a bit) that an employer may describe how overtime will be calculated when different overtime rates are possible. Thus, if an employee sometimes receives bonuses or piece-rates, the notice can explain how overtime is calculated and that the actual overtime rate might change from time to time. (This is the approach we took in our draft form, which can be viewed here.)

Employers should remain aware of any future requirements adopted by the Labor Commissioner and ensure that forms are provided whenever required. Failure to provide a form when require may support penalties under the California Labor Code Private Attorneys General Act (“PAGA”), one of the most pervasive and expensive types of claim brought against employers today.

2023 Employment Law Update

Our initial 2023 Employment Law Update is on January 10, 2023, in Napa, California. The presentation will cover new laws from the past year as well as recent court cases and administrative developments. Some topics include:

• Minimum wage and other wage-payment changes

• Pay data reporting and pay scale disclosure

• Leaves of absence and sick pay use

• Reproductive health decisionmaking

• Emergency condition protection

• COVID-19 exposure notification, workplace standards, Cal-OSHA regulation

• Employee and consumer privacy issues

• Specific industry regulation such as hotel, agricultural, and call-center employers

• State and federal agency changes

• Federal NLRB policies affecting non-union employers

• Recent caselaw affecting rounding, penalties, arbitration agreements and confidentiality

View a copy of the 2023 update via this link.