Tip Pooling

What Is Tip Pooling?

Tip pooling is an arrangement where employees combine their tips and redistribute them among the group according to a predetermined formula. In California, tip pooling is legal but strictly regulated to ensure that tips go to the workers who earned them, not to employers or managers.

California Labor Code Section 351 provides robust protections for tipped employees, making it illegal for employers to take any portion of employee tips. Understanding these rules is essential for restaurants, bars, hotels, and other service businesses operating in California.

California Tip Pooling Rules

Labor Code Section 351

The foundation of California tip law states:

"Every gratuity is hereby declared to be the sole property of the employee or employees to whom it was paid, given, or left for."

Key Principles

Rule	Description
Employee Property	Tips belong entirely to the employee who receives them
Employer Prohibition	Employers cannot collect, take, or deduct from tips
Manager Exclusion	Managers and supervisors cannot participate in tip pools
Agent Restriction	Employers cannot take tips through agents (third parties)
No Conditions	Employers cannot condition employment on sharing tips

What Qualifies as a Tip?

Tips are voluntary payments made by customers in addition to the price of goods or services:

Counts as a Tip	Does Not Count as a Tip
Cash left on table	Mandatory service charges
Credit card gratuities	Automatic gratuities (unless later distributed to employees)
Tips added to checks	Payments for goods or services
Gifts from customers	Commissions
Tips given to tipped employees	Administrative fees

Who Can Participate in Tip Pools?

Eligible Employees

Employees who can share in tip pools:

Position	Eligible?	Reasoning
Servers	Yes	Directly serve customers
Bartenders	Yes	Provide service and receive tips
Bussers	Yes	Support service staff
Food runners	Yes	Contribute to customer service
Host/Hostess	Yes	Part of customer experience
Barbacks	Yes	Support bartenders
Kitchen staff	Yes (in some cases)	Recent case law allows in certain circumstances

Ineligible Employees

Those prohibited from tip pool participation:

Position	Why Ineligible
Owners	Have ownership interest in the business
Managers	Exercise supervisory duties
Supervisors	Direct work of other employees
Directors	Have managerial authority
Employers	Cannot take any portion of tips

The Manager/Supervisor Question

Determining who is a "manager" or "supervisor" for tip pool purposes:

Factors Indicating Manager Status

• Authority to hire or fire employees
• Authority to direct the work of others
• Authority to discipline employees
• Spending more than 50% of time on supervisory duties
• Classified as exempt from overtime

Working Supervisors

• Employees who occasionally supervise but primarily perform regular duties
• May participate in tip pools for time spent in non-supervisory role
• Analysis is fact-specific and case-by-case

Tip Pool Distribution Methods

Common Distribution Formulas

Method	How It Works
Equal Share	All tips divided equally among participants
Points System	Points assigned based on position; tips distributed proportionally
Hours Worked	Tips distributed based on hours worked during shift
Percentage-Based	Different percentages for different positions
Hybrid	Combination of methods

Example: Points-Based Distribution

A restaurant uses this point system:

Position	Points	Shift Tips	Distribution
Server	10	-	$150.00
Bartender	8	-	$120.00
Busser	5	-	$75.00
Food Runner	4	-	$60.00
Host	3	-	$45.00
Total	30	$450	$450

Calculation: Total tips ($450) ÷ Total points (30) = $15 per point

Example: Percentage-Based Distribution

Position	Percentage	Shift Tips	Distribution
Server	70%	$500	$350
Busser	15%	$500	$75
Bartender	15%	$500	$75
Total	100%	$500	$500

Tip Pooling Best Practices

Establishing a Tip Pool

1. Written Policy: Create a clear, written tip pooling policy
2. Define Participants: Clearly identify who participates
3. Distribution Formula: Establish a fair, consistent formula
4. Employee Notice: Inform all employees of the policy
5. Regular Review: Periodically assess fairness and compliance

Documentation Requirements

Document	Purpose
Written tip pool policy	Establishes rules and participants
Employee acknowledgment	Confirms understanding of policy
Tip collection records	Tracks tips received
Distribution records	Documents how tips were divided
Participant logs	Shows who shared in each distribution

Common Tip Pool Mistakes

Mistake	Problem
Including managers	Violates Labor Code 351
Employer deductions	Illegal taking of employee tips
Arbitrary changes	Can indicate discrimination
Poor documentation	Difficult to prove compliance
Unclear eligibility	Creates confusion and disputes

Service Charges vs. Tips

Key Distinction

Service Charge	Tip
Mandatory	Voluntary
Set by employer	Set by customer
Property of employer	Property of employee
Must be disclosed	Customer discretion
Can go to employer	Must go to employees

Mandatory Service Charges

When a business adds a mandatory service charge (e.g., 18% gratuity for large parties):

• It is not a tip under California law
• Employer can keep it entirely (unless promised to employees)
• If called "service charge" or "gratuity," customer may reasonably believe it goes to staff
• Best practice: Distribute to employees or clearly disclose its use

Disclosure Requirements

If a business adds service charges:

• Disclose that it is not a tip
• Explain how the charge is used
• Inform customers if they can add additional tip
• Train staff on explaining the charge

Tips and Credit Card Processing

Credit Card Fees

Whether employers can deduct credit card processing fees from tips:

Scenario	California Rule
Flat monthly fee	Cannot be deducted from tips
Per-transaction fee	Generally cannot deduct
Percentage fee on tip amount	Most courts say cannot deduct

Best Practice: Absorb credit card fees as a cost of doing business rather than risk Labor Code 351 violation.

Credit Card Tip Distribution

Requirements for distributing credit card tips:

1. Prompt Payment: Tips must be paid in same pay period as earned
2. Full Amount: Entire tip must go to employee (no deductions)
3. Documentation: Include tips on wage statement
4. Payment Method: May be cash or paycheck

Timing of Tip Distribution

Tip Type	When Due
Cash tips	End of shift or employer's regular payment date
Credit card tips	No later than next regular payday
Tip pool distributions	Per established policy, but by next payday

Tip Reporting and Taxes

Employer Responsibilities

Responsibility	Requirement
Record keeping	Track all tips received and distributed
Wage statements	Include tips on employee pay stubs
Tax withholding	Withhold income and FICA taxes on reported tips
Form 8027	Large food establishments must file annually
W-2 reporting	Report tips as employee income

Employee Responsibilities

Responsibility	Requirement
Report tips	Report all tips to employer (cash and credit card)
Daily log	Keep personal record of tips received
Form 4070	Report tips to employer by 10th of following month
Tax payment	Pay taxes on all tip income

IRS Tip Reporting

The IRS requires:

• Employees report tips over $20/month to employer
• Employers withhold taxes on reported tips
• Allocated tips when total reported is less than 8% of sales
• Annual Form 8027 for large food/beverage establishments

Tip Theft Remedies

What Constitutes Tip Theft?

• Employer takes any portion of employee tips
• Manager participates in tip pool
• Employer requires tip-out to ineligible employees
• Deductions from tips for breakage, shortages, or fees
• Requiring employees to share tips with employer

Penalties for Tip Violations

Penalty	Amount
Return of tips	Full amount wrongfully taken
Additional amount	Equal to the tips taken (double damages)
Interest	10% per year
Attorney's fees	If employee prevails in lawsuit
PAGA penalties	$100-$200 per pay period per employee

Filing a Tip Claim

Employees can recover stolen tips by:

1. Filing a wage claim with the Labor Commissioner
2. Filing a civil lawsuit
3. Joining a class action
4. Filing a PAGA claim

Industry-Specific Considerations

Restaurants and Bars

Consideration	Best Practice
Back-of-house inclusion	Check current case law; may now be permitted
Bartender tip-outs	Ensure bartenders consent and benefit
Server tip-outs	Must go only to eligible participants
House accounts	Clearly distinguish service charges from tips

Hotels

Consideration	Best Practice
Housekeeping tips	Tips left in room belong to housekeeping
Valet tips	Go to valet staff, not employer
Bellhop tips	Property of bell staff
Concierge tips	Belong to individual concierge

Salons and Spas

Consideration	Best Practice
Individual tips	Generally go to the service provider
Tip pooling	Less common; individual service model
Reception desk	May participate if part of service team
Credit card fees	Cannot deduct from tips