Many employees in food service and the hospitality business earn some of their income through tips. While it is true that employers have the right to require workers to pay into a tip pool, they may not violate an employee’s legal rights.
Every employer requiring workers to participate in tip pooling, or tip sharing, must be careful to observe the legal rights of employees because there are limits to who can participate in a tip pool and how much can be contributed to it. Knowing these tip laws and rights can go a long way for employees such as waitresses, bartenders, cleaning staff, and others who deal with tips on a daily basis.
Defining Tip Pooling in California
Tips have long been a form of compensation in addition to minimum wage or base pay set by state or federal labor codes for service workers. According to California Labor Law 351, a tip is considered a form of gratuity that is voluntarily left by the customer for the employee over the amount due for the goods or services rendered. They are the sole property of the employee.
Tip pooling or tip sharing is the practice of gathering the tips earned by certain employees, and dividing them with multiple other employees. Many service employees rely solely on tips for the bulk of their income, with some even earning more through tips than through basic wages. Some types of employees that typically receive tips are:
- Waiters and bussers
- Valet attendants
- Housekeeping or cleaning staff
- Delivery people
- Spa and salon owners
- Event planners
The way that the funds are divided up must be fair and reasonable, and typically follow an agreed-upon formula for the organization’s established tip pooling policies. Tip pools are often used in order to:
- Offset the differences in tip earnings between shifts that are peak hours and off-hours
- Reduce competition at work
- Lighten strain during the work day
California Law on Tip Pooling
In California, employer-mandated tip pools are generally legal if certain conditions are met. These conditions include:
- The individuals participating in the tip pool are employees.
- The tips included in the pool must have been given to the employees.
- The employer, managers, supervisors, and owner cannot share in the tip pool.
By definition, an employer is considered the employee’s boss with the power to:
- Fire or hire an employee
- Supervise, control, or direct what the employee does on the job
An employer must never require that the portion paid into the tip pool be more than a customary and reasonable share. Additionally, all tips should belong to the employee who earns them – not the employer. However, with a valid tip pooling arrangement in place, the employer may pool and distribute employees’ tips, but must observe the legal guidelines for doing so.
Employers cannot deduct hourly wages from tipped employees based on the amount of wages earned. This is known as a “tip credit” and is unlawful. According to California state law, all tipped workers in California must receive at least the state’s minimum wage, which is $15.50 as of 2023. Remember, tips are considered income but are not considered wages.
Tipped employees have a legal right to take cash tips home immediately. When the tip is through a credit or debit card, the tipped employee has a right to the full amount of the tip by the next payday. The employer cannot deduct any merchant fees or credit card processing fees from these types of kids. Employers also have a responsibility to:
- Keep a record of all of these tips
- Make the record available to the California Labor Commissioner’s Office
Illegal Tip Pool Arrangements and Your Rights
If you suspect your tip pool arrangement may be in violation of legal guidelines of tip pooling in California, it’s important to contact an attorney skilled in employment law. Many labor codes outline the limitations involved in tip pooling as well as the rights and remedies available when an employer engages in illegal tip pooling. An experienced attorney, familiar with the labor code in your state, can identify any tip laws that have been violated and give important advice about successfully pursuing a tip pooling case against your employer.
It is illegal for an employer to participate in a tip pool or otherwise take any amount of tip money from an employee who was responsible for earning the tip money. Employers who violate gratuity and tip laws in California are guilty of a misdemeanor offense, which is punishable by:
- A fine of $1,000
- Up to 60 days in jail
- Restitution for the employee for the tips that were taken
Employees who believe that their employers are unlawfully taking wages should consider contacting an attorney. Consulting with an employment attorney will ensure that you are well aware of the legal landscape and prepare you for the next steps if your employer has violated any California labor laws.
Please keep in mind that every situation is different and the only way to know whether you have a case is to contact an employment attorney. Your employment attorney will be able to discuss the following options with you.
- Bring a lawsuit for civil penalties under the Private Attorney Generals Act.
- File a lawsuit under California’s Unfair Competition Law (UCL).
- File a lawsuit against the employer for conversion.
- File a lawsuit for breach of contact.
Gratuity and tips are distinguishable from service fees or service charges. A gratuity or tip is money that a customer voluntarily leaves for an employee over the amount of dues for the goods sold or services rendered. Since the tip amount is left to the discretion of the employee who serves the customer they are entitled to the total amount.
On the other hand, a service charge, also known as an operations fee, is an amount that a patron is required to pay based on a contractual agreement or a specified required service amount listed on the menu of an establishment. A service charge is mandatory and customers cannot opt not to pay for the fee because it is part of the total bill. Service charges belong to the employer and the decision to split them amongst employees is left to the employer.
Under California’s tip law, all cash and non-cash, including electronic tips paid through credit, debit, or gift cards, checks, and even non-cash tips received by an employee are income and are subject to Federal income taxes if they total $20 or more in a month, provided the employee reports the amount in a written statement furnished to the employer. However, if the employee does not earn at least $20 tips in a month, they are not required to report the tips to their employer, and taxes are not required to be withheld, but you still need to include these tips in taxable income when you prepare your income tax return. Even Though tips are taxable in California, they are not considered wages and employers must pay their employees minimum wage regardless of tips or gratuity the employee earns.
In California Tip Law, it is legal to participate in tip-pooling and split tips among employees, provided that all of them are willing to participate in such agreements and that the employer is not a part of the tip-pooling. In fact, tip pooling is deemed by the court as something that “ensures an equitable sharing of gratuities in order to promote peace and harmony among the employees and provide good service to the public.”
Yes, the Internal Revenue Service requires employees to declare their cash tips that amount to over $20 to their employers in a written statement using Form 4070, which is a voluntary form providing a convenient format for documenting a daily record of tip income. After reporting your accomplished Form 4070, you will then give it to your employers on or before the 10th day of the month following the month in which the tips were received.
Meanwhile, unreported tips should still be declared using the following forms:
To report the amount of any unreported tips in order to include it as additional wages and indicate it on their forms such as:
As well as the employee share of Social Security and Medicare tax owed on those tips.
Getting Help with Your Tip Pooling Case
If you work in the service industry it is important to be aware of the laws protecting employees regarding tip pooling. Service workers should be aware that there are legal rights designed to protect tip earners and to ensure that employers correctly distribute both wages and money earned from tips.
To get help with your tip pooling case, contact the experienced attorneys at Shegerian & Associates. Our excellent team of attorneys, well-versed in employment law, is standing by to answer your questions and provide the sound legal advice you need today.