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Employer Tips on Employee Tip Income

May 16, 2008
Some of the highest paid employees in the country relative to their skill, education and knowledge are service workers that regularly receive tips. Dancers, waiters, waitresses, and bartenders often earn more than professionals including nurses and lawyers. It is not uncommon for a bartender to earn $80,000 a year or a dancer to earn $200,000 a year.

Often this leads to business managers and owners to take tip income from these workers and redistribute it or pocket it, or as a basis to set up a compensation system that does not comply with the labor code. Some employers pool tip income and distribute to all employees, some distribute on the basis of categories of jobs, and some include all employees. Some employers may attempt to use tip income in determining if the employee is getting paid minimum wage.

California law regulates gratuity and income and specifies what type of actions are prohibited. The California Division of Labor Standards Enforcement defines the term "gratuity"as follows. "Gratuity" includes any tip, gratuity, money, or part thereof, which has been paid or given to or left for an employee by a patron of a business over and above the actual amount due such business for services rendered or for goods, food, drink, or articles sold or served to such patron. Any amounts paid directly by a patron to a dancer employed by an employer subject to Industrial Welfare Commission Order No. 5 or 10 shall be deemed a gratuity. It defines the term "Business" as meaning any business establishment, or enterprise, regardless of where conducted.

The courts consistently have held that they will defer to the regulations established by such agencies as the Division of Labor Standards Enforcement and therefore the regulations are substantially law. Occasionally the court will reverse a DLSE order, but that is very rare.

The DLSE specifically states that:

The DLSE and the Labor Code specifically prohibit employers and their agents from taking, sharing, or receiving tip money left for employees. The term agent has been defined as every person other than the employer having the authority to hire or discharge any employee or supervise, direct, or control the acts of employees.

Tip pooling policies where waiters, waitresses, busboys, and bartenders share in the tips is deemed to be legal, because it is a long-standing practice in the restaurant industry. This was the opinion in the case of Leighton v. Old Heidelberg, Ltd., 219 Cal.App.3d 1062 (1990), but it was a split decision and may change in the future if appealed in a different district, but for now it is the law.

The DLSE also issued and opinion letter in 2005 , where it interpreted Labor Code section 351 to allow for a tip pool policy requiring the employee receiving the tip to contribute 15% of the actual tips to the tip pool and all money from the tip pool then to be distributed to the other employees in the "chain of service" based on the number of hours they worked, as is consistent with industry custom, provided:

1) Tip pool participants are limited to those employees who contribute in the
chain of the service bargained for by the patron, pursuant to industry custom
[examples of employees included in "chain of service" provided in Opinion Letter],

2) No employer or agent with the authority to hire or discharge any employee
or supervise, direct, or control the acts of employees may collect, take or receive
any part of the gratuities intended for the employee(s) as his or her own.

The DLSE also prohibits employers from making wage deductions from gratuities, or for using gratuities as direct or indirect credits against the employee's wage and it also specifically disallows a recovery of credit card charges incurred by the employer.

Under federal law and employer can have an employment agreement with the employee that would allow an employer to employ so-called "tip credits" against wages owed to an employee, but the practice is illegal under California law.

California law requires every employer keep accurate records of all gratuities received by him, whether received directly from the employee or indirectly by means of deductions from the wages of the employee or otherwise. Such records shall be open to inspection at all reasonable hours by the DLSE. The employer to keep accurate records of any gratuity received by him through any means including credit cards and because of the requirement the burden of proof regarding amounts due em ployees from credit card charges would be on the employer.
The Court of Appeal held that any cost of doing business must be borne by the employer and not the employee. Inasmuch as credit card purchases are common, the cost of credit card charges are a cost of doing business. Thus this decision had been interpreted by DLSE to prohibit any deduction from the wages of employees by the employer to recover costs incidental to tips left for employees.

Sometimes employers attempt to get around these rules and pocket a large chunk of the tips by categorizing the employee as an independent contractor and renting space to the employee or setting some sort of an arrangement where the employee pays the employer instead or purchases supplies from the employer. The DLSE and the courts have both defined the characteristics of an independent contractor and these arrangements, rarely work, because the employee is an employee and not an independent contractor.
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