Can Owners Take Tips in California? A Complete Guide to State Tip Laws and Employee Rights

Find out when California business owners can share in tips, how tip pooling works, and minimum wage obligations. Get a breakdown of employee tip rights, illegal practices, service charges, penalties, and protection options for California workers.

By Douglas Wade, Attorney

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Have a quick question? We answered nearly 2000 FAQs.

Table of Contents

1. Introduction

2. Recognizing the differences between federal and California law

3. Laws governing credit card tips

4. Tip Credit

5. Specific tipping regulations in California

6. Minimum wage & tip laws in California

7. Pay for overtime in California

8. A brief explanation of service charges

9. Penalties for violating California’s tip laws

10. Examples of infractions related to tips

Introduction

The tip laws in California are among the strongest and most favorable to employees nationwide. In an effort to surprise multi-state operators, some of them even go against the conventional norm or pattern.

Even seasoned restaurateurs may find it difficult to navigate California’s legal distinctions, which make it practically a different nation. Recently, workers at Jon & Vinny’s launched a class-action complaint against the Italian restaurant, alleging that they underpaid servers because of an unclear service fee structure.

If you’ve ever wondered, “Can owners take tips?” in California, the short answer is no.

Unlike other US states, tip credits are not available to employers in California. Additionally, they are unable to withhold credit card costs; therefore, full tips are always given to FOH employees. In addition to any gratuities received, business owners are required to pay tipped employees the entire minimum wage.

Important clauses

Employers are required to pay the minimum wage of $16 an hour with full tips.
Tips, whether from charge cards or tip pooling, must be handed out by the following pay period.
Tip pooling is only available to service chain employees (runners, bussers, and servers).
Businesses that engage in unlawful tip practices risk fines of up to $1,000, sixty days in prison, or both.

When business owners ask, “Can owners take tips?” the law’s answer remains clear: they absolutely cannot.

Recognizing the differences between federal and California law

The labor laws in California are more extensive than those in the majority of other states. Additionally, it is fairer to employees in a number of ways. The most detailed information about gratuities and tips can be found in Section 351, which states that tips are “claimed to be the exclusive property of the worker or workers to whom they were paid, provided, or left for.”

Thus, the employer is unable to:

Take any portion of the tip that was left for a worker.
Take any money owed for tips from an employee’s pay.
Deduct any portion of the tips from the employee’s pay.

“Can owners take tips?” No. Not under any circumstances allowed by California law.

Laws governing credit card tips

The FLSA and California tip laws are different when it comes to credit card fees. The California labor legislation prohibits businesses from deducting credit card charges from tips whenever customers pay with credit cards, despite federal law permitting this practice. In California, the employer is responsible for paying any credit card fee for processing, and the employee is entitled to the full tip amount.

Additionally, Section 351 establishes a deadline for businesses to pay out credit card tips: “not later than the next normal payday after the date that the customer approved the credit card payment.”

Tip Credit

The inability of companies in California to use gratuities as a “tip credit” toward the minimum wage requirement is another significant distinction between the state of California and other states. This means that in California, tipped workers must be paid their tips as well as the California minimum wage, currently at $15.50 an hour but increasing to $16 an hour on January 1, 2024.

Most other states allow companies to compensate employees with less than the minimum wage, provided that they earn sufficient tips to fill the gap (so-called tip credit). However, tip credits are not permitted for companies in California. Along with any tips they may receive, employers are required to pay workers no less than the minimum wage in California for every hour they work.

It often raises the question again: “Can owners take tips to balance payroll costs?” The answer remains firm. No, they can’t.

Specific tipping regulations in California

Employers must be aware of California’s additional restaurant tipping regulations in addition to Section 351.

Tip sharing: Employers may mandate that tipped staff members split their gratuities with other staff members (sometimes referred to as tip sharing or tipping pooling), but only when they are directly serving customers or are part of the customer’s supply chain. Managers, cooks, cleaners, and cashiers must not be included in any obligatory tip pool program, even if they perform direct service for customers.
Fair & reasonable: Policies related to tip pooling must be both fair and reasonable. Employers, for instance, cannot mandate that tipped workers give their tips to supervisors or managers, and the amount given must be fair. (The term “fair” isn’t defined here, but at an average restaurant, a tip pool wherein waiters keep only 10% of tips and bartenders and bussers take home 90% wouldn’t be considered reasonable.)
Prompt payment: Employers are required to reimburse tipped employees by the following payday for both pooled tips and tips received as a consequence of credit card transactions.

Minimum wage & tip laws in California

Employers may use a tip credit towards the state minimum wage in several states, which permits restaurants to pay below the minimum wage as long as tips equal or surpass the difference. However, tip credits of any kind are prohibited in California.

From the Department of Industrial Relations of the state:

In California, a business is not permitted to deduct employee tips from its minimum wage duty, in contrast to federal regulations. According to California law, workers must be paid the minimum wage + any gratuities left by customers of the employer’s establishment.

One reason why restaurants in California have greater operating costs than in other states is this major divergence from federal legislation.

Pay for overtime in California

The lower-tipped minimum salary in states that provide tip credits might make overtime calculations challenging. However, the computation of overtime compensation is really easy in California. When an employee works more than 40 hours during a week, their regular rate of pay—typically the California minimum salary—is increased by 1.5. A worker keeps all tips received during overtime and regular hours, and tip income is not included in this computation.

A brief explanation of service charges

Like a number of other states, California has decided that required service fees—such as those that are routinely added to the invoice for large parties—do not qualify as tips. They are part of the restaurant and not the employee who has received the tip.

When any or all of that additional money is given to the employees by the restaurant, they are required to count it as regular taxable wages and not as a tip, and as such, the normal amounts of taxes would be withheld.

Nevertheless, this ruling is overruled by several towns. According to Section 4.62.040 of the Santa Monica City Code Ordinances, employers are required to pay service charges “in the full amount to the workers who rendered services for the clients from whom those Service Charges are received.”

In an uncommon move, a group of restaurants in the Bay Area added an 18% service fee for groups of at least one. The restaurant’s owners made it apparent that they utilized this levy to raise employee wages rather than menu prices, despite the employer facing criticism online and in the arena of public opinion.

The restaurant conforms to California laws as long as it refrains from using cash as a tip.

Again, for clarity — “Can owners take tips in California?” The law couldn’t be clearer: no, they cannot.

Penalties for violating California’s tip laws

Under Section 354, a violation of the regulations of California tip is a misdemeanor punishable by a maximum of $1000 fines or up to 60 days in jail, or both.

How could this take place? Here are several examples:

Tips are taken into account by a local company in California when determining the minimum wage.
In California, a multi-state business fraudulently asserts a tip credit that is permitted in other states.
A company engages in the tip pooling that is allowed, but provides invalid employees (e.g., managers, cooks, dishwashers, and cashiers) with the tips pooled.

In any occurrence, an employer can receive the above fines when they violate the rights of the employees in terms of hourly wages, tips, sharing tips, or any other facet where there are safeguards therein.

Examples of infractions related to tips

If a tip infringement is found, it doesn’t matter if it was intentional, unintentional, or careless; they are all susceptible to the fines mentioned above.

Here are some further instances of tip infractions that may occur in California restaurants:

Tips are deducted from the minimum salary paid by an employer to a tipped employee. You have to pay the entire state’s minimum wage if there is no tip credit.
For uniforms, lunches, or other costs, an employer takes money out of a tipped worker’s pay: Employers are not allowed to garnish employees’ earnings or accept gratuities as payment, even when it is permissible for staff members to pay for specific items.
Employees who get gratuities are required by their employers to give them to managers and supervisors. Although tip pooling is permitted, owners, managers, and supervisors are not allowed because they are regarded as the employer’s agents.
Tipped employees are not paid by their employers by the next pay period. Tipped employees must receive their gratuities promptly, even if there is a lag between the time of sale and the money entering the company’s bank account.

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Can Owners Take Tips in California? A Complete Guide to State Tip Laws and Employee Rights

Introduction

Recognizing the differences between federal and California law

Laws governing credit card tips

Tip Credit

Specific tipping regulations in California

Minimum wage & tip laws in California

Pay for overtime in California

A brief explanation of service charges

Penalties for violating California’s tip laws

Examples of infractions related to tips

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