If you run a restaurant in California, you’ll likely see your servers and hosts receiving many tips to supplement their wages. You may wonder if you’re allowed to take a cut of those gratuities or if you should be sharing them among the team. Understanding the legalities of tipping in California helps you treat your team members fairly and comply with the law.

Federal Minimum Wage & Tip Credits

California has one of the highest minimum wages in the United States. Employees in this state enjoy a minimum of $16 an hour, more than double the national minimum of $7.25 per hour.

Can an employer use tips to make up part of an employee’s wages? Under federal law, this would be the case. Federal law states that employers can take a tip credit, which allows tips to account for a portion of the person’s minimum wage.

However, where state law offers more employee protections than federal law, it overrides it. California state law forbids tip credits, so employers must ensure they pay the minimum wage without any sort of tip credits.

Tip Pooling & Sharing Regulations

While employers cannot use tips to make up wages, they can implement a tip pool. Tip pooling ensures that employees who may normally receive fewer tips, such as hosts or table runners, get a better portion of the available cash.

California tip pooling laws state:

• Back-of-house staff or those not involved in the chain of service to the tipping guests cannot take part in the tip pool.
• Managers and owners also cannot take money from the tip pool — even if they directly interact with diners.
• Tips must be distributed fairly and reasonably.

The California Department of Labor Standards Enforcement suggests that 80% of tips are shared equally among waitstaff, 15% to bussers, and 5% to bar staff. These are guidelines, and businesses can choose their own rates as long as they are fair.

Tip sharing is similar, but employees share tips directly with other employees. This approach is hard to record and track, which can cause issues for owners as all tips must be legally recorded and reported. Tipping software is a great solution for managing both tip pooling and sharing, especially because owners can opt for digital payouts to help employees access their tips more easily.

Mandatory Service Charges

What is a service charge? Any restaurant can add a mandatory service charge to a check. This could be an additional charge for a special event, large groups, or a catering surcharge.

However, it’s not a tip, and employees have no right to this money. Mandatory service charges are part of the restaurant’s revenue.

A restaurant owner can choose to share service charges among employees. But if they do, they must record them as additional wages, not tips. This means they get taxed as wages, plus other deductions like Social Security and Medicare.

The best practice is to note on a check that a service charge is not a tip. That way, the employee may still receive a tip during the transaction. However, there’s no law that demands this.

Starting July 1st, all non-optional fees must be included in menu item prices, except for tips and gratuities, impacting restaurants already dealing with increased costs from wages, staff retention, and tech partners. Ongoing legislation might exclude restaurants, allowing fees if noted in the menu. Watch Kirk Grogan, COO of TipHaus, explain this new law in detail.

Credit Card Processing Fees

Can owners take tips to cover card fees? In some states, restaurants can pass a portion of a credit card processing fee onto the employee — if the employee receives a tip. The tip and the charge must occur in the same pay period (usually one month), and employees must be notified that this will occur.

In California, however, the law forbids employers from passing on credit card processing fees to tipped employees. Collected tips belong to the employee and cannot be reclaimed for any type of operational cost.

Protecting Tipped Workers’ Rights

Many restaurant owners may have misconceptions about tipping in California because it differs from the federal norms. The minimum wage is much higher, and there is no option to take a tip credit like in many other states. Tips cannot be used to cover restaurant costs, but tip pooling is legal when handled fairly.

When you understand how to treat your employees fairly, you’re more likely to retain them for longer. Getting to grips with recording tips received and distributing them in a reasonable manner can help you run a successful business that attracts the best type of attention — happy diners and employees.

You can learn more about tipping in California and other states on the U.S. Department of Labor resource site and by working with experienced experts like TipHaus. We provide tipping software for restaurants nationwide, so we understand the intricacies of state vs. federal law and how to ensure your tipped employees are treated fairly — while still turning a profit. 

Book a demo and see for yourself how the right platform can take the complexities out of tipping in California.