Here’s a Tip

I own a restaurant and I’m not sure what to do with the tips that my servers receive. Do I need to keep track of their tips? If a customer uses a credit card, can I subtract the credit card processing fee from the tip? What about tip pooling?

Money that customers pay, give or leave for an employee, over the amount actually owed for the goods or service, is considered a tip (or gratuity) and it is the sole property of the employee to whom it was given.

In California, owners and managers are prohibited from sharing in or keeping any portion of gratuity that customers give to employees. You may not make wage deductions from gratuities, or use gratuities as a credit against wages, since tips are voluntarily left by the customer and never belong to the employer. Employees must be paid the minimum wage, on top of any tips they may receive.

A service charge, unlike a tip, is an amount that an establishment charges customers as part of the service contract. Interestingly, employers need not share any portion of the service charge with employees.

Employers who fail to keep accurate records of all gratuities can be charged with a misdemeanor, punishable by a fine not exceeding $1,000, or by imprisonment for not longer than 60 days, or both.

If you run a large food or beverage establishment, use IRS Form 8027 (Employer’s Annual Information Return of Tip Income and Allocated Tips) to file an annual return of receipts for food or beverage operations and tips reported by employees.

When a customer uses a credit card to pay their bill and adds a tip, you are required to pay your employee the tip in full, no later than the next regular payday following the transaction. You may not deduct credit card processing fees or costs from a tip.

You may require your employees to share tips (tip pooling) with other staff that provide service, as long as you don’t keep any tips yourself. In a restaurant, this would include employees who provide direct table service, such as waiters and waitresses, busboys, bartenders and hosts or hostesses. Owners, managers and supervisors may not receive compensation from the tip pool.

Violation of any of these rules could end with a wage claim before the Department of Labor Standards Enforcement (DLSE), a civil lawsuit for unpaid wages, or both. The DLSE treats underpayment and nonpayment the same and regularly seeks waiting time penalties and liquidated damages in both situations.

Mary Luros is a business law attorney with Hudson & Luros, LLP, in Napa, and can be reached atmary@hudsonluros.com or 418-5118. The information provided here is not intended as legal advice, nor does it form an attorney-client relationship with the author. The author makes no representations as to the reliability or accuracy of the above information. In a perfect world we wouldn’t need disclaimers — or attorneys.