Do you earn tips? Plenty of employees in California do, including those who wait tables, serve and mix drinks, open doors, carry luggage, clean hotel rooms, or provide other services, from moving furniture to delivering newspapers. In fact, some employees earn more in tips from satisfied customers than in straight wages paid by their employers.
When you receive tips as part of your compensation, your legal rights under wage and hour laws become a bit more complicated. The rules about what counts as a tip, how much your employer must pay you, and whether you have to contribute to a tip pool (among other things) all depend on the laws of your state. Although federal law also covers these issues, employers must follow whichever law—federal, state, or even local—is the most generous to employees. California law is very protective of employees, so state laws typically trump federal laws on wages and hours.
Here's what you need to know about California legal protections for employees who receive tips. You can find out more about California's minimum wage, tip rules, overtime standards, and other wage and hour issues at the California Division of Labor Standards Enforcement.
The basic rule of tips is that they belong to the employee, not the employer. Under California law, an employer cannot take any part of a tip that's left for an employee. This means that you can't be forced to share your tips with the owners, managers, or supervisors of the business (who are all considered to be the agents of the employer).
Your employer also can't count your tips towards its minimum wage obligations. In most other states, employers may pay employees less than the minimum wage, as long as the employees earn enough in tips to make up the difference (called a “tip credit”). However, California does not allow employers to take tip credits. Employers must pay employees at least the California minimum wage for each hour worked, in addition to any tips they may receive. (You can find the current minimum wage in our article on California wage and hour laws.)
California law does allow tip pooling, though. An employer may require a group of employees to pool together their tips, which are then distributed among the employees in the pool. However, California employers must follow certain guidelines in order to create a valid tip pool.
First, only certain employees can be included in the tip pool. Employees may be included in the tip pool only if they are in the “chain of service” that results in a tip from a particular customer. In general, servers, bartenders, hosts, and bussers are considered to be in the chain of service, while cooks, dishwashers, and cashiers are not. The one exception to the “chain of service” rule is that managers and supervisors cannot partake in the tip pool even if they provide direct table service.
Second, the tips must be distributed in a fair and reasonable manner. There must be a fair system for deciding how much in tips is paid out to each employee, usually in proportion to the amount of service the employee provided to the customer. In general, the lion's share of the tip should go to the server, with a smaller portion going to the busser, and an even smaller portion going to the bartender or host. The California Department of Labor Standards Enforcement, the agency that enforces wage and hour laws, has found the following distribution to be legal in a traditional restaurant setting: 80% to wait staff, 15% to bussers, and 5% to bartenders. However, whether a distribution is fair depends on the circumstances of each business and is decided on a case-by-case basis.
It's not as easy as you might think to figure out exactly how much of what a customer pays is a "tip." If the customer pays in cash and tipping is voluntary, whatever amount the customer leaves over and above the charge for products or services (plus tax) is a tip. However, if the employer imposes a mandatory service charge, or the customer pays by credit card, the rules might be different.
Some restaurants tack a “mandatory service charge” on to bills for large tables of diners, private parties, or catered events. Under federal and California law, this isn't considered a tip. Even if the customer thinks that money is going to you and doesn't leave anything extra on the table, your employer can keep any money designated as a "service charge." The law generally considers this part of the contract between the patron and the establishment, not a voluntary acknowledgment of good service by an employee. Many employers give at least part of these service charges to employees, but that's the employer's choice: Employees have no legal right to that money.
Under IRS rules, any portion of a mandatory service charge that the employer pays out to employees must be treated as wages, not tips. This means the employer must withhold and pay Social Security and Medicare (FICA) tax on these amounts, may not claim a credit against its tax obligations for these amounts (as it can for tips), and must include them as part of the employee's hourly wage when determining overtime payments, among other things.
The rule applies only to mandatory service charges. For the amount to count as a tip rather than a service charge, all of the following must be true:
If the tips are left by credit card, some states allow employers to subtract credit card processing fees from the employee's tips. The employer would typically subtract a proportionate amount of the tip to cover the employee's “share” of the fee. For example, if the credit card company charges a 3% fee, the employer could legally reduce the employee's tip by 3% as well. However, California doesn't follow this rule. Under California law, the employer has to give the employee the full tip left by the customer and pay the entire credit card processing fee itself.