Both federal law and California law impose rules on employers about how to treat tips that their employees receive. It is important for employers in California to understand both sets of rules.
Federal Fair Labor Standards Act
The FLSA addresses tips in 29 U.S.C. section 203(m), which provides that an employer may add “an additional amount on account of the tips received” to the cash wage, in determining whether it has satisfied the minimum wage law with respect to a tipped employee (defined as an employee who customarily and regularly receives more than $30 a month in tips). The cash wage must be at least $2.13 per hour. The additional amount may not exceed the value of the tips actually received by an employee. The employer must inform all its tipped employees if it will be taking a credit against minimum wage for tips. The employer must include the amount of any tip credit that it takes toward the minimum wage in the total compensation for the week from which the regular hourly rate is derived for computing overtime. 29 CFR section 531.60.
All tips belong to the employees who received them, but the statute is not intended “to prohibit the pooling of tips among employees who customarily and regularly receive tips.” The FLSA does not impose a maximum contribution amount or percentage on valid mandatory tip pools, but the employer, however, must notify tipped employees of any required tip pool contribution amount, and may only take a tip credit for the amount of tips each tipped employee ultimately receives. Further information on regulation of tips under the FLSA is available in the Department of Labor’s Fact Sheet #15.
In a recent decision, the Ninth Circuit ruled that even employers who did not take tip credits against the minimum wage were subject to the requirement in the Department of Labor’s regulations that mandatory tip pools must be composed only of employees who customarily and regularly receive tips. See Oregon Restaurant and Lodging Ass’n v. Perez, Case No. 13-35765 (9th Cir. Feb. 23, 2016).
UPDATE: The omnibus budget reconciliation act signed by President Trump on March 23, 2018, altered the federal rule to allow employers to require tip sharing with cooks, dishwashers and other “back-of-the house” workers who do not customarily and regularly receive tips. The rule still prohibits owners, supervisors and managers from taking a cut of the tips.
The wage and hour laws in California do not permit employers to take a credit against the minimum wage for tips received by their employees. The Labor Code declares all “gratuities” to be the sole property of the employees who received them. Cal. Lab. Code section 351. When a gratuity is given to an employee by means of writing an amount on a credit card slip, that amount must be paid to the employee no later than the next regular pay day with no deduction for processing fees.
Because the employer has no interest in gratuities under California law, tips are not included in the calculation of the regular rate of pay used to determine overtime pay.
The courts have interpreted section 351 to allow mandatory tip pools, so long as the pool is limited to those in the chain of service and does not include owners, managers or supervisors. Etheridge v. Reins Internat. California, Inc., 172 Cal. App. 4th 908 (2009); Jameson v. Five Feet Restaurant, Inc., 107 Cal. App. 4th 138 (2003). Cal. Lab. Code section 350.
The California Labor Commissioner has an FAQ page on tips and gratuities at its website.