Laws for Receiving Tips and Gratuities

Many employees working in restaurant, valet and other performing services often receive tips and gratuities, which are subject to income tax. Tips and gratuities are the sole property of the employee to whom they were given, meaning they cannot be collected or received by the employer. Additionally, an employer cannot credit the employee’s tips and gratuities against his/her wages to satisfy wage requirements. Since tips are subject to income taxes, employees should report tips to their employers who may then make the appropriate deductions for said taxes on the next paycheck. Some employers attempt to deduct the actual tip amount from the hourly wages earned by each employee; however, this is illegal in the state of California.

In addition to the employer, it is also illegal for any “agent” of the employer to collect, take or receive any tips or gratuities given to an employee by patrons. According to Labor Code, an “agent” is defined as every person other than the employer who has the authority to hire or discharge any employee, or supervise, direct or control the employees’ actions.

It is very common for businesses in restaurant and hospitality industries to create Tip Pooling for employees. A tip pool is created when those employees who receive tips and gratuities place them into a pool which is then divided amongst all employees. The idea is to spread the risk of receiving little or no tips and gratuities from low-tipping patrons among all tipped employees. Tip pools also create a way for tips and gratuities to be shared with employees who are not directly tipped by customers, such as table bussers. Although California law does not specifically prohibit involuntary tip pooling, the employer or any agents of the employer cannot share in the tips.

There are a few downsides for employers when creating tip pools: (1) There may be less incentive for employees to work hard for their tips and gratuities when they know it will not go straight into their own pockets; (2) all employees who contribute to the patron’s service should be included in the tip pool, which other employees may not agree with; and (3) there is always a risk that the tip pool may later be determined unlawful. Conversely, not implementing a tip pool may cause some employees who do not receive tips and gratuities to demand a higher pay rate.

If patrons are permitted to pay tips by credit card, employees must receive their tip amounts no later than the next regular payday following the date the patron authorized the credit card payment. Employers must keep accurate records of tips and gratuities received, including those received by employees through a customer’s credit card. Additionally, costs of credit card charges incurred by the employer cannot be deducted from tips and gratuities paid by the customer on said credit card. Since the employer chose to use the services of the credit card company, the employer, not the employee, must bear the cost of using that service.