Federal & State Tip Law
Tip pooling, tip sharing, and server tip out laws
A tip, or gratuity, is any money in excess of the actual cost for products, services, and tax that is voluntarily given to or left for an employee by a patron of the employee’s business. Tipped workers are often employed in the restaurant and hospitality industries as waiters and waitresses, bar tenders, hosts, sushi chefs, bell hops, doormen, and hotel cleaners.
California labor law and the federal Fair Labor Standards Act (FLSA) protect tipped employees by guaranteeing minimum wage and overtime standards, providing for fair tip sharing, and ensuring that tips remain the sole property of the employee who earns them.
Can Restaurant Managers Take Tips?
It is illegal under California and federal law for restaurant owners, managers, or supervisors to keep or share any portion of the tips provided to its employees by patrons. Exceptions may arise with laws concerning the tip credit, tip pooling, and credit card tips.
However, California’s tip laws are more favorable for employees than federal tip laws where exceptions may apply. When conflicting tip laws exist, employers must follow the federal, state, or local law that is most favorable to the employee.
Federal labor law permits certain employers to apply a tip credit toward the federal minimum wage they’re obligated to pay employees. The amount of the tip credit, or tip offset, cannot exceed the difference between the required minimum cash wage for tipped employees and the federal minimum wage. In other words, all employers who intend to claim a tip credit must be able to prove that employees’ minimum cash wages combined with the tip credit amount equal at least the federal minimum wage. If not, the employer is legally obligated to make up the difference to the employee.
The current minimum cash wage is $2.13, the current federal minimum wage is $7.25, and the maximum tip credit an employer can claim under Section 3(m) of the FLSA is $5.12.
Some circumstances allow employers to apply additional overtime tip credits to their minimum wage obligations.
Section 3(m) of the FLSA requires employers who apply a tip credit to provide the following information to its employees via oral or written notice:
- The amount of cash wage the employer is paying a tipped employee, which must be at least $2.13 per hour
- The additional amount claimed by an employer as a tip credit, which cannot exceed $512 (the difference between the minimum required cash wage of $2.13 and the current minimum wage of $7.25)
- That the tip credit claimed by the employer cannot exceed the amount of tips actually received by the tipped employee
- That all tips received by the tipped employee are to be retained by the employee except for a valid tip pooling arrangement limited to employees who customarily and regularly receive tips
- That the tip credit will not apply to any tipped employee unless the employee has been informed of these tip credit provisions
California Tip Credit Law
California Labor Code Section 351 prohibits employers from applying any tip credit toward their minimum wage obligation to employees. California tipped employees are entitled to receive the California minimum wage, in addition to any and all tips they may receive.
Tip Pooling Laws and Rules on Restaurant Tip Outs
With tip pooling or tip sharing, tipped employees combine some or all of their tips into a lump sum that is subsequently distributed among a group of tipped employees. Voluntary and involuntary tip pooling is legal under both California and federal law, so long as owners, managers, and supervisors do not participate in the pool, even if they provide direct table service.
Federal Tip Pooling Law
Federal law prohibits employees “who do not customarily and regularly receive tips,” such as dishwashers, cooks, and janitors, from participating in a tip pool.
California Tip Pooling Law
Under California Labor Law, only employees working in the “chain of service,” such as servers, bartenders, hosts, and bussers, may legally participate in a tip pool. Any workers with the authority to hire and fire employees or direct other employees’ work is not permitted to participate in a California tip sharing arrangement.
Additionally, the law requires that tips be distributed in a fair and reasonable manner that considers the hour of numbers the tipped employee worked and how much of their work directly impacted the experience of the patron who left the tip. These policies may be unique to the business and vary on a case-by-case basis.
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