A Comprehensive Guide to Tip Laws in California

A Comprehensive Guide to Tip Laws in California
7shifts Staff

By 7shifts Staff

California has some of the strongest, most employee-friendly tip laws in the country. Some of them even reverse the standard rule or pattern, threatening to catch multi-state operators by surprise.

California’s law differences make it almost like another country unto itself, and can trip up even established restaurateurs. Jon & Vinny’s employees recently filed a class-action lawsuit against the Italian food restaurant, claiming that they shorted servers’ pay due to a murky service fee policy.

Understanding how California differs from federal laws

California’s labor code is more comprehensive than most other states’ regulations. It’s also more generous to employees on several points. Section 351 gives the most information on gratuities or tips, stating that tips belong to employees, not employers (“declared to be the sole property of the employee or employees to whom it was paid, given, or left for”).

This means the employer can’t:

  • Take any part of a tip left for an employee.
  • Deduct any amount from an employee's wages due to tips received.
  • Credit any part of the tip against an employee's wages.

Credit card tip laws

California tip laws also differ from FLSA on credit card fees. While federal law allows employers to deduct credit card fees from tips when customers pay using a credit card, California labor code doesn’t allow this. In California, the employee must receive the entire tip amount, and the employer must cover any credit card processing fees.

Section 351 also sets a time limit for employers to pay out tips collected via credit card: “not later than the next regular payday following the date the patron authorized the credit card payment.”

Tip credit in California

Another important difference between California and other states is that employers in California can’t use tips as a "tip credit" toward their minimum wage obligation. This means that tipped employees in California must be paid the full California minimum wage (currently $15.50 per hour, but increasing to $16 per hour starting January 1, 2024), plus any tips they receive.

Lisa Guerin, J.D. explains:

“In most other states, employers may pay employees less than the minimum wage, as long as the employees earn enough in tips to make up the difference (called a "tip credit"). However, California does not allow employers to take tip credits. Employers must pay employees at least the California minimum wage for each hour worked, in addition to any tips they may receive.”

Specific California requirements for restaurant tipping

Beyond Section 351, California has various other requirements for restaurant tipping that employers need to know.

  • Tip pooling: Employers can require tipped employees to share their tips with other employees (a practice known as tip pooling or tipping out), but only if they provide direct table service or are in the chain of service to the customer. Any mandatory tip pool policy must exclude managers (even when they provide direct table service), cooks, dishwashers, and cashiers.
  • Fair and reasonable: Tip pooling policies must be fair and reasonable. For example, employers can’t require tipped employees to share their tips with managers or supervisors, and the percentage shared must be reasonable. (“Reasonable” here is not clearly defined, but for example, a tip pool where bartenders or bussers walk away with 90% of all tips and servers keep just 10% wouldn’t hold up as reasonable in a typical restaurant.)
  • Timely pay: With both pooled tips and those collected as part of credit card transactions, employers must pay tipped employees their tips by the next payday after the tip is paid.

California’s law on minimum wage and tips

Many states allow employers to claim a tip credit against the state’s minimum wage (allowing the restaurant to pay less than the full minimum wage, so long as tips make up or exceed the difference). But California doesn’t allow any form of tip credit.

From the state’s Department of Industrial Relations:

“Unlike under federal regulations, in California, an employer can’t use an employee’s tips as a credit towards its obligation to pay the minimum wage. California law requires that employees receive the minimum wage plus any tips left for them by patrons of the employer's business.”

This significant departure from federal policy is one cause for restaurants’ higher operating costs in California compared to other states.

Overtime pay in California

States that do allow for a tip credit have a lower tipped minimum wage, which can cause complications in calculating overtime. But in California, overtime pay calculations are relatively simple. Multiply an employee’s regular rate of pay—most often the California minimum wage—by one-and-a-half for all hours worked over 40 in a week. You don’t factor tip income into this calculation, and an employee keeps all tips earned during both regular and overtime hours.

A quick note on service charges

California joins many other states in ruling that mandatory service charges (like those automatically added to the bill for large parties) are not tips. They are the restaurant’s property, not the tipped employee’s.

If a restaurant pays some or all that additional money to tipped employees, they have to treat it like regular taxable wages, not like tip income—meaning it’s subject to regular tax withholdings.

However, some municipalities overrule this decision. Santa Monica’s Code of Ordinances, section 4.62.040 states that employers must distribute service charges “in their entirety to the Employee(s) who performed services for the customers from whom the Service Charges are collected.”

One Bay Area restaurant group implemented a mandatory service charge in an unusual way, adding an 18% service charge for parties of one or more. While the employer faced backlash online (and in the court of public opinion), the restaurant ownership was clear that they used this charge to increase employee wages instead of increasing menu prices.

As long as the restaurant doesn’t treat that money as a tip, it complies with California regulations.

Consequences for not abiding by California tip laws

Section 354 states that violating California tip laws is a misdemeanor offense with a maximum penalty of a $1,000 fine, up to 60 days in prison, or both.

How might this happen? Here are a few scenarios:

  • A local California employer counts tips toward its minimum wage requirement.
  • A multi-state chain incorrectly claims a tip credit, which is legal in other states, in California.
  • A restaurant engages in tip pooling (which is legal) but pays out pooled tips to invalid employees (management, cooks, dishwashers, cashiers).

In any case, if an employer violates employee rights around hourly wages, tips, tip pooling, or any other element with protections in place, the employer could face the penalties mentioned above.

Examples of tip violations

It doesn’t matter if a tip violation is willful, accidental, or negligent—they’re all subject to the penalties discussed above if discovered.

These are a few more examples of tip violations that occur in California restaurants:

  • An employer pays a tipped employee the minimum wage but counts tips toward that figure: With no tip credit in the state, you must pay the full California state minimum wage.
  • An employer deducts money from a tipped employee's wages for uniforms, meals, or other expenses: While it’s not illegal for employees to pay for certain things, employers can’t garnish their wages or take tips as a means of payment.
  • An employer requires tipped employees to share their tips with managers or supervisors: Tip pooling is legal, but managers, supervisors, and owners aren’t eligible—they’re considered agents of the employer.
  • An employer doesn’t pay tipped employees their tips by the next payday: Even though the employer may experience a delay between the point of sale and money arriving in the business’s bank account, tipped employees must get their tips on time.

Additional resources

Stay up to date on California tip laws and employment laws with these detailed resources:

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7shifts Staff
7shifts Staff

7shifts team of writers and experts in the hospitality industry.