PAYDAY Workforce Solutions Blog

Businesses Barred From Requiring Employees to Share Their Earned Tips

On May 16, 2016

For years, many bartenders and servers have had to share their gratuities with other staff members, regardless of whether the establishment is a casual or upscale setting. This is known in the service industry as “tipping out” and many restaurants in California require their servers and bartenders to hand over a portion of their earned tips and divide it up between the other staff, such as hostesses, food runners, bussers, cooks and dishwashers. While many restaurants manage this process ethically, some employers abuse this process and take a cut for themselves.  Regardless of the intent, the process of tipping out is no longer allowed.

A recent court ruling is pushing California restaurant owners to reconsider how they are managing tips. The 9th Circuit Court of Appeals made a 2-1 decision to stop businesses from demanding their employees share their tips with other staff. This ruling applies to those workers who are paid minimum wage plus tips.  Reuel Schiller, a labor law professor at the University of California, Hastings in San Francisco said, "The premise is the tip is never the employer's. The employer doesn't have the power to take that from the waiter and give it to a dishwasher because it's not the employer's money."

Some restaurants in California don’t require their employees to share tips with the kitchen staff at all because of the legal uncertainty, but the court’s decision has raised a lot of questions about how other establishments should compensate their employees.

Alternative Pay and Healthcare Insurance Surcharge

Restaurants have gotten creative and have tried alternative pay solutions.  Some employers have chosen to raise their employees’ wages significantly and eliminate tipping altogether; some believe that an “all-inclusive service fee” is the way forward. With a service charge or fee, restaurant owners can distribute the pay more equally between the staff while also paying for their healthcare.

More than a dozen high-end restaurants in California introduced a 3% surcharge to pay for their employee’s medical insurance after the healthcare mandate was implemented in 2008. Over 200 employees in California now have medical insurance paid for them by the healthcare surcharge. The decision to implement the surcharge was motivated by the inequality between servers and “back of the house” staff, like dishwashers, cooks and bussers because servers and bartenders usually make significantly more money than the kitchen staff.

9th Circuit Ruling Applies to Seven States

The 9th Circuit Court of Appeals ruling applies to the states that require their employees be paid minimum wage plus tips and according to the Labor Department’s Wage and Hour Division, the seven states that fall in this particular category are:

  • Alaska
  • California
  • Minnesota
  • Montana
  • Nevada
  • Oregon
  • Washington

The 9th Circuit Court of Appeals said the ruling was consistent with Congress' goal of ensuring tips stay with the employees who earned and received them. The labor department in the past, has banned employers who make their employees use their tips in order to fulfill the hourly minimum wage requirements from taking those tips from the employees and giving them to other employees who don't usually receive tips. Supporters of the ruling have said that employers should pay their “back of the house” staff higher wages, rather than take tips from bartenders and servers to compensate them.

PAYDAY Can Helped Keep You Informed

The expert staff and HR partners here at PAYDAY can help you understand the ruling and can help keep your establishment in compliance. If you have any questions regarding anything in this article or questions about how PAYDAY can help you, give us a call at (714) 467-3434 and our staff will be more than happy to point you in the right direction.

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