Posted on September 10th, 2018
Understanding what wage you’re supposed to give tipped employees can be very confusing, especially in the state of California.
Read on to learn more about the sometimes confusing California laws on tipped employees.
There are all types of benefits to making an hourly wage. Hourly employees get paid for the exact amount of time they put in. If they have to work more, they have to get paid more.
And then there are tips, which allow people to take home fast cash at the end of every shift. But things can get tricky when you have to determine how much these employees should earn in a paycheck.
Some employers pay their tipped employees more per hour. Others only pay the minimum wage. In some positions, employees rely on tips more than others, and a lot of this has to do with state laws that are in place.
California has their own set of laws in regards to minimum wage and tips. If you run a business with employees who make a living off tips, you probably know how confusing payroll can be.
That’s why we’ve come up with this guide to help you understand the laws in California when it comes to tips.
Let’s get started!
What Is Gratuity?
Gratuity is money given to an employee by a customer. To an extent, they’re rewards that can measure the quality of an employee’s service.
Customers are the ones to determine how much gratuity they give an employee. They have the right to give any amount in the form of a tip as they please. And they also have the right to select who earns their tips.
Employers do not regulate or determine how much money their employees earn in tips. They cannot interfere with a customer’s right to tip. They also can’t dictate gratuity payments in their employer policy.
The federal Fair Labor Standards and California’s Labor Code regulate tips and gratuity. These laws not only protect employees but enforce them on employers.
Where Does Minimum Wage Come into Play?
As of 2018, the minimum wage in California is $10.50 per hour in companies with 25 employees or less. The minimum wage in companies with more than 26 employees is $11.00 per hour.
More times than not, tipped employees earn far more than minimum wage. When this happens in certain states, employers can credit tips as part of an employee’s wage.
But in California, this is not legal. Under California law, employers must – at least – pay the minimum wage.
Employers must do this no matter how much their employees earn in tips per hour.
When Must Employees Receive Their Tips?
Employees must receive their cash tips immediately after a customer gives them. By law, employers cannot interfere with this.
But not all customers pay tips in the form of cash. Many people pay tips with their credit cards. Which means it’s up to the employers to make sure their employees receive this money.
Under California law, employers must give employees the full tip left by the customer. Employers cannot deduct any money to cover credit card processing fees. They must pay the full credit card processing fee themselves.
What Is the Relationship Between Tips & Overtime Pay?
By California law, money in the form of gratuity is above the amount that an employee must earn for their work. Gratuity is not considered wage.
But the state of California does consider them taxable income. (I know imagine that!)
This is most relevant when it comes to calculating overtime for tipped employees.
Employers must pay their employees the regular rate of pay for overtime work. California’s Labor Code enforces this. By law, tips are not calculated into an employee’s regular rate of overtime pay.
What About Tip Pooling?
It takes a team to keep a business afloat. It’s not just the front-of-the-house employees who make success happen. Lots of work gets done behind the scenes, and everyone deserves to get compensated.
Employers can authorize tip pooling so that all employees are fairly compensated. Under California law, this is legal – for the most part. There are certain conditions that employers must adhere to, however.
Tip Pooling Conditions
Everyone who receives money from a tip pool must be employees. The tips pooled in must come from customers to the employees.
There are also conditions regarding who can receive money from tip pools. Owners, employers, and managers cannot earn money from tips pools.
How much each employee earns from a tip pool can get murky, however. And California law does not always provide protection here.
Employers should distribute this money fairly, impartially, and within reason. The system for doing so should treat all employees as equal and free of discrimination.
Are Mandatory Service Charges Considered Tips?
Businesses can add mandatory service charges for a number of reasons. Restaurants and bars add them all the time for large parties or catered events, for example.
But, under California law, mandatory service charges are not considered gratuity. Customers may think that these service charges function as tips to the employees. But they are not considered as such, and instead, this money goes right to the employers.
Employers can, however, distribute this money to their employees as they see fit. They can also contribute this money towards an employee’s minimum and overtime wages.
Mandatory Service Charge Conditions
At the end of every shift, service charges aren’t considered tips. And employees must still earn minimum wage regardless.
The taxes surrounding mandatory service charges are different from gratuity taxes. This is still the case even if employees receive the money that comes from service charges.
Employers can’t interfere with the tips that their employees make. And even if employers give this money to their employees, they still have to pay taxes on them.
Understanding California’s Laws for Tipped Employees
California provides some of the most restrictive laws for employers when it comes to tip in the entire country.
Compared to other states, tipped employees in California not only get more protection but they also earn more money per hour compared to tipped workers in other states.
As an employer in California, it’s important to follow the state’s labor laws. Not only to protect your business but to encourage a positive work environment.
But there’s more you can do to protect both your workers and your business. For more information on California’s labor laws, check out our blog today!
