Tip Pooling Basics

cash bar tips

Photo by Bob Doran, Flickr Creative Commons

        Though the concept of tipping has developed through custom, a business’s tipping practices are regulated by state law. This is especially true within California.  This series will explain acceptable tipping practices for businesses within the state.  Here, it begins by explaining tipping in California through the lens of property rights.

          Acceptable tipping processes are mostly governed by Labor Code Section 351.  This provision states that “No employer or agent shall collect, take, or receive any gratuity” if the patron intended for the gratuity to be given to an employee.  Effectively, if custom indicates that a customer’s tip is meant to reward an employee’s good service, then the business and its agents cannot claim any property right to the tip.  The tip is the property of the employee or employees who provided a service to the customer.

Though simplistic on its face, the above provision of Section 351 leads to a number of distinctions and circumstances in need of interpretation.  Such a situation is explained within the text of Section 351 itself.  The legislation expressly prohibits an employer from reducing wages as a result of gratuities or from requiring an employee to credit the amount of gratuities against wages.  This portion of the law means an employer cannot avoid paying an employee the minimum wage by reducing wages in the amount the employee is making above the minimum wage. (Most other states allow a “tip credit” against wages). Instead, employees are entitled to both the minimum wage paid by the employer and the entirety of gratuities paid to them by customers.

Another wrinkle resolved by Section 351 itself is how credit card payments of gratuities should be resolved.  With any credit card payment, the amount is divided between the credit card company and the entity which is being paid by the customer.  Section 351 creates the clear solution as to how gratuities should be divided when paid by credit card.  The credit card company will receive the same portion it ordinarily does, but this portion must be paid by the employer. This will leave the employee to own the entire amount of their tip.  For example, if a customer provides a five dollar tip, the employee will receive all five dollars.  Payment of this gratuity must be made to the employee by the time of his or her regular payday.  The employer must pay the amount due to the credit card company from its own separate funds.

Section 351 has distinct implications for an employer implementing mandatory tip-pooling systems.  A mandatory tip-pooling system simply refers to an employer requiring a system by which the total amount of gratuities is divided amongst a group of employees.

When determining whether a mandatory tip-pooling system is legal, it is important to distinguish between the front of the house and back of the house.  The front of the house refers to employees who directly interact with the customer, such as hosts, servers, and bartenders.  Back of the house refers to employees who serve the customer through less direct interaction with customers, such as kitchen workers or food runners.

Presently, the U.S. Supreme Court is considering a case regarding mandatory tip-pooling between front of the house and back of the house employees. The pending case considers these systems in light of the federal Fair Labor Standards Act, addressing an issue which has yielded mixed results throughout the country.

As the law currently stands in California, an employer can implement a mandatory tip-pooling system which requires front of the house employees to share their gratuities with back of the house employees.  In 2016, the Ninth Circuit Court of Appeals upheld a previous ruling which disallowed mandatory tip-pooling with back of the house employees.  This ruling follows the concept that customers’ tips reflect the service of front of the house employees.  The 2016 Oregon Restaurant and Lodging Association v. the Department of Labor and Cesarz v. Wynn Las Vegas cases left room for an exception to this general rule, however.  This exception allows for tip-pooling to be implemented so long as tips are not credited against the minimum wage.  Since Section 351 does not allow tips to be credited against the minimum wage, the Ninth Circuit decision does not practically impact business practices in California.

Though a surprising decision from the U.S. Supreme Court may alter the state of the law, California law presently allows employers to implement tip-pooling in a manner which can include both front of the house and back of the house employees.  So long as the entirety of a customer’s gratuity is given to employees, the tip-pooling system is likely to be allowable under California law.

An employee cannot directly sue under Section 351, but instead may file a complaint with the Labor Commissioner’s office that has the authority to investigate the alleged violations.  Alternative options may provide other grounds for lawsuits.

Photo Credits: Photo by Bob Doran, Flickr Creative Commons

About William Adams

Attorney at Norton, Moore, & Adams, LLP.
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