Tip Rules Under the FLSA

The Fair Labor Standards Act permits an employer to take a credit against its minimum wage obligation for tips that its employees receive. Recent statutory, regulatory and case law developments make it advisable to review the rules. (Caution: State rules may impose stricter limits than the FLSA does. See Tipping and the Wage and Hour Rules, which contains a discussion of California law.)

Section 3(m) of the FLSA (29 U.S.C. section 203) permits an employer to take a tip credit toward its minimum wage obligation for tipped employees equal to the difference between $2.13 and the federal minimum wage (currently $7.25). That provision raises the following questions:

Who is a "tipped employee?" A tipped employee means any employee engaged in an occupation in which he or she customarily and regularly receives more than $30 a month in tips.

Do tips belong to the employer or the employee? Although the employer may take a credit, the tips belong by law to the employee. An employer may not keep tips received by its employees for any purposes, including allowing managers or supervisors to keep any portion of an employee's tips.

May an employer require tipped employees to participate in a tip pool? Yes, if the employer does not take a tip credit, and pays its tipped employees a cash wage that equals or exceeds the minimum wage. Those who take a tip credit may not require tip pooling.

Who may the employer require to be included in a tip pool? Those employers who pay the full federal minimum wage without a tip credit may require tipped employees to share their tips with employees who are not customarily and regularly tipped, such as cooks and dishwashers. (This is a change from the prior rule under a DOL regulation that prohibited those who did not take a tip credit from requiring tips to be shared with untipped employees. The change resulted from Congressional action earlier this year.) However, as mentioned above, managers and supervisors may not participate in tip pools.

What about employees who perform some duties for which they regularly receive tips, and some for which they do not? The DOL's dual jobs regulation, and an interpretive guidance in Chapter 30 of the Wage and Hour Division's Field Operations Handbook (section 30d00(f)) require employers to pay their tipped employees a cash wage equal to at least the federal minimum wage for duties that they do not regularly receive tips for. The employer may apply a tip credit to time the tipped employee spends on incidental duties that are related to the tipped occupation, up to 20 percent of the total hours worked in the tipped occupation during the workweek. Related duties for a server could include such tasks as filling salt and pepper shakers while the restaurant is open, cleaning and setting tables, making coffee, and occasionally washing dishes. Cleaning bathrooms and washing windows do not constitute related duties.

The Ninth Circuit recently explored the applicable rules in March v. J. Alexander's LLC, Case No. 15-15791 (9th Cir. 9/18/2018).

Tip Pooling in Casinos

The Second District Court of Appeal in Los Angeles has ruled that casinos may insist on tip pooling among their employees, but found that the Hawaiian Gardens Casino may have violated the ban on participation in tip pools by supervisors. Lu v. Hawaiian Gardens Casino, Inc., Case No. B194209 (Jan. 22, 2009). We previously wrote about tip pooling in this blog on July 6, 2008, in our report on the Starbucks settlement with its baristas.

Labor Code section 351 prohibits employers from taking tips or crediting tips toward minimum wage obligations. However, under a 1990 Court of Appeal decision, employers may insist that employees pool their tips so that all are treated fairly. Leighton v. Old Heidelberg, Ltd., 219 Cal.App.3d 1062 (1990). That decision explained: "To the contrary, the restaurant business has long accommodated this practice which, through custom and usage, has become an industry policy or standard, a "house rule and is with nearly all Restaurants," by which the restaurant employer, as part of the operation of his business and to ensure peace and harmony in employee relations, pools and distributes among those employees, who directly provide table service to a patron, the gratuity left by him, and enforces that policy as a condition of employment."

The Hawaiian Gardens Casino dealers argued in their class action lawsuit that the rule permitting tip pooling should not apply to them because the tips were handed directly to them, and were not intended to be left for all the employees in the casino who provided service. The court rejected the argument. "As in restaurants, a tip pool in a casino promotes good service among all of the employees who come in contact with the patron, which enhances the casino's reputation and increases its business."

However, that did not get the casino out of the lawsuit. There was evidence that some of those who participated in the tip pool acted in a supervisory capacity by participating in evaluations and by directing and advising dealers on their conduct. That would make such employees "agents" who are barred by section 351 from receiving any tip money.

Although there is no private right to sue under section 351, any violation of the statute may form the basis for a claim under the Unfair Competition Law, Business and Professions Code section 17200.

Starbucks To Pay Over $100 Million For Requiring Baristas To Share Tips With Supervisors

The Case

A San Diego Superior Court judge recently determined that Starbucks owes over $100 million for allowing its shift supervisors to participate in tip pools at its restaurants. The practice ran afoul of a California law that makes tips the sole property of the employees who receive them. Starbucks management had reasoned that shift supervisors deserved a share of the tips because they spent time doing the same tasks -- making drinks and serving customers -- as the baristas who were entitled to the tips. But, the court ruled that shift supervisors could not participate because they also directed the work of the baristas. Chou v. Starbucks Corp., Case No. GIC836925 (San Diego Superior Court 3/14/2008).

The judge computed the amount owing by estimating the average hourly tip rate earned by the shift supervisors at $1.71, and multiplying that times the 50,694,674 hours that shift supervisors had worked during the relevant time period. That amounted to $86.7 million. The balance of the award was for accrued interest. The judge also enjoined Starbucks from continuing its practice. Click here to read the judge's decision.

The Rules on Tips

The California statute (Labor Code section 351) declares all tips to be the sole property of the employee or employees to whom they were left.  It is illegal for an employer or its "agent" to collect, take, or receive a tip, or to deduct any amount attributable to tips from wages owed to the employee. "Agent" means every person other than the employer who has authority "to hire or discharge any employee or supervise, direct, or control the acts of employees."

Since tips belong to employees, the employer may not count tip money toward its obligation to pay minimum wage. (This differs from the rule under the federal Fair Labor Standards Act, which allows employers to credit some tip money toward the minimum wage, as explained here.) At the same time, the rule means that tip money is not counted toward the regular rate of pay for computing overtime pay.

Tips include any money left for an employee over and above the actual amount due the business for services rendered or for goods, food, drink, or articles sold or served to the patron. For dancers, the definition is broader, covering any amounts paid directly by a patron to the dancer. For an explanation of the legislative intent behind that provision, see Jameson v. Five Feet Restaurant, Inc., 107 Cal.App.4th 138 (2003) and the 2001.06.22 opinion letter listed under "Resources" below.

A 1990 Court of Appeal decision ruled that employers could require employees to pool their tips without violating the statute. But, requiring tipped employees to share with supervisors who meet the definition of "agent" is not permitted, as Starbucks has now learned, at a cost of $100 million plus. For further information about tip pooling, see Leighton v. Old Heidelberg, Ltd., 219 Cal.App.3d 1062 (1990); the Jameson decision referred to above, and the 2005.09.08 and 1998.12.28-1 opinion letters listed under "Resources" below.

Resources

Starbucks Decision

California DLSE Tips and Gratuities FAQ

California Labor Code Provisions on Tips

DLSE Opinion Letter 2005.09.08

DLSE Opinion Letter 2001.06.22

DLSE Opinion Letter 1998.12.28-1