Federal & California Tip Law

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.

Employer Withholding Your Tips?

If you suspect your employer is withholding or improperly reducing your tips or minimum wage under California or federal law, you may be eligible to file a wage claim to recover your damages.

Understand your rights as a worker. Call or message us to speak with an employment attorney about your potential wage claims. All consultations are free and confidential.

We Get Results for Employees

Acosta $9.9 million for unpaid overtime and business expenses
Spansion $8.5 million for employees laid off without proper notice
Masco Backpay for workers who were misclassified
Fleetwood Backpay for employees laid off without proper notice
Cosmo $1 million for merchandisers who were not compensated for off-the-clock work
First Franklin Backpay for workers who were not paid overtime

Tip Credit

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:

  1. The amount of cash wage the employer is paying a tipped employee, which must be at least $2.13 per hour
  2. 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)
  3. That the tip credit claimed by the employer cannot exceed the amount of tips actually received by the tipped employee
  4. 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
  5. That the tip credit will not apply to any tipped employee unless the employee has been informed of these tip credit provisions

Tip Credit Law in California

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

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 Laws

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 Laws

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.

Credit Card Tips

Businesses pay transaction fees to banks and creditors when patrons pay for products and services with credit cards. Tips left by customers on credit card transactions are treated differently under California and federal law.

Credit Card Tips Under the FLSA

Under the FLSA, employers may deduct a proportionate amount of an employee’s tip to cover the cost of a credit card processing fee, for example, by reducing the employee’s tip by 2% for a credit charge with a 2% processing fee. Any such deduction, however, may not reduce the employee’s pay below the federal minimum wage.

Credit Card Tips in California

In California, employers are not permitted to reduce employees’ tips on credit card charges. California tipped employees are entitled to receive 100% of the tips they’ve earned, even on credit card charges.

Both federal and California Labor Law require employers to provide credit card tips to employees as wages by the next regular payday after the tip was given.

Service Charges

Any mandatory service charges imposed by a business on its customers – including, for example, a service charge for a large party at a restaurant – are not considered tips under California or federal law.

Employers are legally entitled to keep any and all profits generated from mandatory service charges, though some employers elect to distribute a portion of these profits to their employees.

Our Employment Experience

Our employment attorneys have been representing classes of employees in state and federal litigation against their employers for over 20 years.

We have successfully litigated employment cases concerning unpaid overtime, meal breaks, and business expenses; employee misclassification; and mass layoffs without proper notice, recovering millions of dollars on behalf of our clients against some of the world’s largest corporations.

Girard Gibbs has been recognized a Tier-1 law firm by U.S. News – Best Lawyers consecutively since 2013, and founders Daniel Girard and Eric Gibbs have been named among the Best Lawyers in America consecutively since 2012.

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Federal law does not require that servers receive minimum wage if their wages plus tips equals minimum wage. State law, however, may require that waiters and waitresses receive minimum wage, in addition to tips. California requires that waiters and waitresses be paid minimum wage, plus any tips they earn on top of their wages.

Federal law permits employers to pay less than the federal minimum wage to tipped workers, if the worker’s tips and wages add up to at least minimum wage ($7.25 per hour). However, federal law requires that tipped workers receive at least $2.13 per hour in cash wages, even if they are earning more than $7.25 per hour in tips.

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