Employer Tips on Employee Tip Income
Some of the highest paid employees in the country relative to their skill, education and knowledge are service workers that regularly receive tips. Dancers, waiters, waitresses, and bartenders often earn more than professionals including nurses and lawyers. It is not uncommon for a bartender to earn $80,000 a year or a dancer to earn $200,000 a year.
Often this leads to business managers and owners to take tip income from these workers and redistribute it or pocket it, or as a basis to set up a compensation system that does not comply with the labor code. Some employers pool tip income and distribute to all employees, some distribute on the basis of categories of jobs, and some include all employees. Some employers may attempt to use tip income in determining if the employee is getting paid minimum wage.
California law regulates gratuity and income and specifies what type of actions are prohibited. The California Division of Labor Standards Enforcement defines the term “gratuity”as follows. “Gratuity” includes any tip, gratuity, money, or part thereof, which has been paid or given to or left for an employee by a patron of a business over and above the actual amount due such business for services rendered or for goods, food, drink, or articles sold or served to such patron. Any amounts paid directly by a patron to a dancer employed by an employer subject to Industrial Welfare Commission Order No. 5 or 10 shall be deemed a gratuity. It defines the term “Business” as meaning any business establishment, or enterprise, regardless of where conducted.
The courts consistently have held that they will defer to the regulations established by such agencies as the Division of Labor Standards Enforcement and therefore the regulations are substantially law. Occasionally the court will reverse a DLSE order, but that is very rare.
The DLSE specifically states that:
No employer or agent shall collect, take, or receive any gratuity or a part thereof, that is paid, given to or left for an employee by a patron, or deduct any amount from wages due an employee on account of a gratuity, or require an employee to credit the amount, or any part thereof, of a gratuity against and as a part of the wages due the employee from the employer. Every gratuity is hereby declared to be the sole property of the employee or employees to whom it was paid, given, or left for. An employer that permits patrons to pay gratuities by credit card shall pay the employees the full amount of the gratuity that the patron indicated on the credit card slip, without any deductions for any credit card payment processing fees or costs that may be charged to the employer by the credit card company. Payment of gratuities made by patrons using credit cards shall be made to the employees not later than the next regular payday following the date the patron authorized the credit card payment.
The DLSE and the Labor Code specifically prohibit employers and their agents from taking, sharing, or receiving tip money left for employees. The term agent has been defined as every person other than the employer having the authority to hire or discharge any employee or supervise, direct, or control the acts of employees.
Tip pooling policies where waiters, waitresses, busboys, and bartenders share in the tips is deemed to be legal, because it is a long-standing practice in the restaurant industry. This was the opinion in the case of Leighton v. Old Heidelberg, Ltd., 219 Cal.App.3d 1062 (1990), but it was a split decision and may change in the future if appealed in a different district, but for now it is the law.
The DLSE also issued and opinion letter in 2005 , where it interpreted Labor Code section 351 to allow for a tip pool policy requiring the employee receiving the tip to contribute 15% of the actual tips to the tip pool and all money from the tip pool then to be distributed to the other employees in the “chain of service” based on the number of hours they worked, as is consistent with industry custom, provided:
1) Tip pool participants are limited to those employees who contribute in the
chain of the service bargained for by the patron, pursuant to industry custom
[examples of employees included in "chain of service" provided in Opinion Letter],
and
2) No employer or agent with the authority to hire or discharge any employee
or supervise, direct, or control the acts of employees may collect, take or receive
any part of the gratuities intended for the employee(s) as his or her own.
The DLSE also prohibits employers from making wage deductions from gratuities, or for using gratuities as direct or indirect credits against the employee’s wage and it also specifically disallows a recovery of credit card charges incurred by the employer.
Under federal law and employer can have an employment agreement with the employee that would allow an employer to employ so-called “tip credits” against wages owed to an employee, but the practice is illegal under California law.
California law requires every employer keep accurate records of all gratuities received by him, whether received directly from the employee or indirectly by means of deductions from the wages of the employee or otherwise. Such records shall be open to inspection at all reasonable hours by the DLSE. The employer to keep accurate records of any gratuity received by him through any means including credit cards and because of the requirement the burden of proof regarding amounts due em ployees from credit card charges would be on the employer.
The Court of Appeal held that any cost of doing business must be borne by the employer and not the employee. Inasmuch as credit card purchases are common, the cost of credit card charges are a cost of doing business. Thus this decision had been interpreted by DLSE to prohibit any deduction from the wages of employees by the employer to recover costs incidental to tips left for employees.
Sometimes employers attempt to get around these rules and pocket a large chunk of the tips by categorizing the employee as an independent contractor and renting space to the employee or setting some sort of an arrangement where the employee pays the employer instead or purchases supplies from the employer. The DLSE and the courts have both defined the characteristics of an independent contractor and these arrangements, rarely work, because the employee is an employee and not an independent contractor.
For a North San Diego County lawyer visit the author’s website.
Arnold Hernandez, attorney,overtime, personal injury, truck accident, car accident, dog bite, and wrongful death, Escondido, San Marcos, Vista, Oceanside, Carlsbad, Encinitas
Do You Have the Right Compensation, Incentive and Bonus Plan or It’s All About Me, Me, Me
Like the rat in the cage we are driven by rewards. It’s only human and also perhaps rat nature. Suffice it to say it’s nature.
So when compensation, the reward, becomes stagnant so does productivity. If like rats we are paid by the time we spend in the cage, then the expected level of productivity is simple compliance.
By focusing on minimum standards employees tend to get there and stay there; a comfort zone or twilight zone or Bermuda Triangle whatever else it can be called.
That comfort zone is not where you need nor want to be. Did you make a conscious decision to not do what is in the best interests of your company? Why? Don’t you ever ask what does your company need? What is the first step?
If you need to make changes, be wary of copying formulas. The best plan is the one that works best for your unique circumstances. Look first to your industry but also take a look outside your industry when looking for the right compensation plan.
The important thing is to first look for the concepts in compensation that drive your company’s performance and productivity.
Sometimes combinations of plans work the best. Simpler is better but sometimes by combining two measures, such as productivity and attendance; a compensation plan can be enhanced.
The best approach is to identify which key performance indicators should be the foundations for the compensation plan.
If you are going from a ‘time and space’ or hourly wage rate to an incentive plan then look for ways to start that change. There may be a great deal of reluctance on the part of your current employees but ask for their opinion. That way, once the plan is implemented there should be no complaints.
Talk about the new plan in your business, group and team meetings. You might start by using small gifts or cash rewards for top performance which helps employees get accustomed to the idea.
The idea is to try to modify your employee’s behavior little by little so it’s preferable to start small and gradually gain credibility. Actually rats do the same thing.
Use spreadsheets to work out the ranges of possible plans. Be wary of straight commission as it can often create internal friction. Don’t forget to look at tying part of your bonus or incentive plan to overall company performance.
Once you have a plan you can test backwards to see how it would work. Depending on your plan, you can do a trial run and see how employees react. Make certain that poor performance is not rewarded.
Establish a minimum performance level and make it the low end of your compensation scale. Make sure your plan is easily track able by both you and your employees.
Under ideal circumstances top performers should get at least two or three times more than minimal performers. Even if you are not able to create such a variation “skew” the better rewards should go toward top performance.
As with all incentives and bonuses it is important that the prize be something the employee considers of significance. Pure praise is fine but a cash reward or dinner for the family makes it tangible and real. To give someone a paltry bonus is the same as saying it does not matter. If it does not matter, why do it?
It is better to have a low base wage/salary with a large incentive component. If the base is too high there is little incentive to perform at higher levels.
Expect minimal employees to whine, complain and quit after the plan is in place. Expect to see more qualified and motivated employees wanting to join your company. Expect your better employees to become more loyal.
A well designed compensation plan can give your company a strong competitive advantage. Too bad your competitors may find it impossible to compete directly with you for the best employees.
Jack Deal is the owner of Jack D. Deal Business Consulting, Santa Cruz, CA. Related articlesmay be found at http://www.jddeal.com/blog/human_resources and http://www.freeandinquiringmind.typepad.com
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