California Tip pooling and Tip credit Laws | TipMetric 2020
In California, service industry employees who earn tips should know about how their tips are handled, what their rites are and what the state law instructs.
While we can assume that virtually all wait staff understand what a tip is, what may not be known are the laws and rules that dictate how tips should be handled and treated by establishments employing wait staff.
Tip Pooling
California does allow employers to require tip sharing and tip pooling and that pool is shared among staff that assist in serving customers as part of their regular job duties. Employees receiving a restaurant tip are only required to contribute what is reasonable and may also ensure that whatever they do keep meets the minimum wage requirements. There are certain guidelines California employers must follow if allowing tip pooling.
Employees who share in the tip pooling must be part of “chain of service” where their actions may result in a tip from a customer. This could include wait staff, bartenders, hosts and buss staff. Not included in this group are dishwashers, cooks and cashiers.
The tip must also be distributed in a way that is reasonable and fair. The California Department of Labor Standards Enforcement has found that a fair and reasonable distribution of tips includes 80% to wait staff, 15% to bussers, and 5% to bartenders. While this distribution is not a law, it does act as a guideline and each employer must take their circumstances into account when distributing shared tips.
Tip pooling software is available to ensure mistakes and disputes are eliminated, making it easier for establishments to save time processing payroll with accuracy.
Mandatory Service Charges
A mandatory service charge is sometimes added to a customer’s bill if warranted, for things such as larger tables, private parties or similar circumstances. This is viewed as part of the contract between the customer and the restaurant and not an indication of good service by the wait staff. In California, this additional charge is not a tip and it should be noted that the establishment should inform the customer of this. If any portion of that service charge is shared with the service staff, then customers should be made aware of that as well.
The Internal Revenue Service, in 2014, created an incentive for establishments to no longer charge mandatory service charges if any portion of it is shared with the staff. If part of the service charge is shared with staff, then it must be categorized as wages instead of tips, and, as a result, must have Social Security and Medicare withheld on these amounts. Any amount given by the customer above the normal cost of food and taxes must be voluntary if it is to be properly categorized as a tip to the service staff.
Credit Card Charges
If an employer pays a processing fee to accept credit cards from customers, and that customer leaves a tip as part of the credit card payment, the employer is not allowed to deduct the employees share of the credit card processing charge the employee realizes in California. The full tip left by the customer, whether their bill is charged via credit card or not, must be provided to the service staff.
The Employer’s Responsibility
In the state of California, employers are required to maintain records of all tips received, either by credit card or by check. In addition, the records must be available for inspection by the California Labor Commissioner. This is done as a protection for employees, as records may help determine whether there is wrongdoing by the employer.
Persons employed within the hospitality industry in California should have an understanding of the state’s rules and rites as well as an understanding of how their income may be impacted.