As defined by Labor Code section 350, a “tip” or “gratuity” includes any money that has been paid, given to, or left for an employee by a patron of a business over and above the actual amount due to the business for services rendered. Tips or gratuities are distinguishable from “service charges,” which are amounts a patron is required to pay based on a contractual agreement or a specified required service amount.

Labor Code section 351 provides that employers may not take or receive an employee’s tips. Unlike federal law, California law also prohibits employers from using tips as a “credit” towards the obligation to pay minimum wage. Federal regulations relating to “tip credits” do not apply in California.

Because tips and gratuities are additional amounts left by customers and not payments for services rendered, they are not included in the calculation of an employee’s regular rate of pay used in overtime pay and meal or rest period premiums.

While employers may not take or receive tips, the California Labor Commissioner and California courts have opined that mandatory tip-pooling policies are permissible. The tip pool may not be used to compensate owners, managers, or supervisors of the business. There is no per se rule regarding the percentage of tips that an employer can mandate be contributed to a pool. Issues such as which employees may participate in the tip pool are fact-specific and generally dependent on things like the chain of service and industry norms. In general, employees who have no customer or client interaction and are not “in the chain of service” should not be included in the tip pool.