In the state of California, every employer is required to paid minimum wage. Though federal laws and other states allow tipped minimums, the state of California does not. In an employee favorable state like California, any employer who employs 26 or more employees has to pay each of their employee no less than twelve dollars ($12.00) per hour for all hours worked (2019). Employers who employ 25 or fewer employees, have to pay to each of their employees no less than eleven dollars ($11.00) per hour for all hours worked (2019). Therefore, tips are paid on top of an employee’s minimum wage.
Understanding the rules.
The first step of compliant tip sharing practices, is establishing tip pool rules. Any gratuity left by a guest, customer and patron are the sole property of an employee or the employee who the tip was left for. Employees are not liable to pay for credit card processing fees and under no circumstance, can an employer deduct the fee amount from an employee. Employers are solely responsible for processing charges.
Generally, if a business charges a service fee for a large reservation, that amount is not qualified as a gratuity. However in local jurisdictions, like Santa Monica, the service does qualify as gratuity. This is where is gets complicated.
Tips vs. regular wages.
Under Federal law, service charges and tips are taxed differently. Any portions of a service charges given to employees, are qualified as regular wages and must be taxed the same.For example:
- Restaurant A is hosting a restaurant buy-out for the evening. They have charged a 18% service charge on a $20,000 bill where 10 employees worked the event. Nowhere in the agreement form does the agreement between the restaurant and the renter is the service charge is explained.The employer will be taking 12% of the service charge from the total bill to split among their employees in the tip pool and keep the remaining 6%.
- $20,000 x 18% = $3600 total service charge
- $20,000 x 12% = $2400 employee portion of service charge
- $20,000 x 6% = $1200 employer portion of service charge
- $2400 / 10 = $240 per employee who worked the event
- The $240 will be considered regular wages - not gratuity
All tips (cash or non-cash) are taxed in a different way. They are not included in overtime calculations and employers are required to keep accurate records of all tips and provide every employee with a tip report.
When establishing tip pools, the second step is see which employees qualify as tip-eligible. According to California’s Labor Code Section 351, “no employer or agent shall collect, take, or receive any gratuity or a part thereof that is paid, given to, or left for an employee by a patron…” As of March 2018, employees must be paid minimum wage to be eligible in a tip pool. This includes kitchen staff, whereas prior only wait staff or employees who interacted with guests were allowed to participate in tip pools.
Prior, only employees who directly deal with customers are allowed to be in a tip pool. As of March 2018, any employees paid minimum wage are eligible to be in a tip pool. This includes kitchen staff, whereas prior only wait staff or employees who interacted with guests were allowed to participate in tip pools.
Generally, management personnel are not tip eligible and they are qualified as “agents.’ In this case, agents are 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;" and employers are defined as "every person engaged in any business or enterprise...that has one or more persons in service under any appointment, contract of hire...expressed or implied, oral or written, irrespective of whether the person is the owner of the business...”
Establishing tip pools.
There are no written rules on how much should be distributed to each employee. However, the distributions must be fair. A court case regarding tip pools reached a conclusion where "a mandatory tip pool should only be sustained under Labor Code, section 351 when it works a fair and equitable distribution among the employees who participate in the tip pool.” Tip pooling practices must be fair, in regards to distribution and equality. If they aren't, they not only violate the Labor code, but they are also no different than withholding employee pay.
Generally management personnel are not allowed in tip pools, however courts have ruled in the favor of managers that perform the same work as employees 90% of the time. In this instance, tips were collected by a general tip jar. If an employer fails to comply to the tip sharing rules, they are subject to a fine of up to $1000 and/or imprisonment of 60 days. This is on top of any funds that they may have to pay an employee if it is brought to court.
As an employer, employee fairness is one of the characteristics that should be practiced. But it may occasionally may fall wayward in the midst of the hustle and bustle of restaurant management. The dependency of managers to focus on running a restaurant and completing administrative tasks like processing payroll can be overwhelming. From an owner's perspective, providing the right tools makes work easy. And we may be biased but tip automation makes payroll run quicker and easier!
This document is provided by Push Technologies Inc. ("Push Operations") for information purposes only. This is not an official or legal document and should not be taken as legal advice. Push Operations does not guarantee or warrant the accuracy or completeness of the information provided. For the most accurate and up-to-date information, please check with the proper governing authority.