Question:

Our business has a mandatory tip pooling policy that requires certain employees to pool their tips. I heard that the California Supreme Court recently decided a case regarding tip pooling. Will this court decision affect my business?

Answer:

As you may know, California Labor Code Section 351 explains that “every gratuity is hereby declared to be the sole property of the employee or employees to whom it was paid, given, or left for.” Labor Section 351 prohibits employers and their agents (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) from sharing in or keeping any portion of a gratuity left for or given to one or more employees by a patron. In recent years, more employees have filed lawsuits against their employers seeking to recover tips.

In early 2009, two California appellate courts took conflicting positions as to whether Labor Code Section 351 enables employees to sue their employers to collect gratuities alleged to have been wrongfully withheld or distributed to others. In one case, Grodensky v. Artichoke Joe’s Casino, card dealers sued the casino where they worked, arguing that a mandatory tip pooling policy unlawfully required the card dealers to share their tips with shift managers. The San Mateo County trial court noted that Labor Code Section 351 did not prohibit mandatory tip pooling policies, and it awarded the card dealers over $344,000 because the mandatory tip pooling policy in that case required the card dealers to share their tips with shift managers. The California Court of Appeal for the First Appellate Division agreed with the trial court, and affirmed its judgment.

By contrast, in Lu v. Hawaiian Gardens, another case in which a card dealer sued his employer, the Los Angeles County trial court dismissed the card dealer’s claims based on Labor Code Section 351. The trial court reasoned that Labor Code Section 351 did not give the card dealer the right to sue his employer to recover alleged misappropriated tips. The California Court of Appeal for the Second Appellate Division affirmed the trial court’s decision.

The Supreme Court of California agreed to review the Lu v. Hawaiian Gardens case in order to resolve the conflict between these two appellate court decisions. After reviewing Labor Code Section 351’s language and its legislative history, the Supreme Court sided with the Lu v. Hawaiian Gardens court. The Supreme Court ruled that the Legislature did not intend to provide employees with the private right to enforce Labor Code Section 351. The Supreme Court invited the California Legislature to enact a law allowing employees to enforce Labor Code Section 351 if the Legislature is inclined to do so.

Notably, the Supreme Court’s ruling only prevents employees from bringing claims to recover gratuities based on Labor Code Section 351. In prior cases, employees have successfully recovered gratuities from their employers based on other laws, such as California’s Unfair Competition Law. For example, although the judgment was reversed on unrelated grounds, a class of Starbucks baristas was awarded over $86 million in their case for collection of gratuities based on the Unfair Competition Law.
While the Supreme Court did not express an opinion as to whether mandatory tip pooling policies are lawful under Labor Code Section 351, numerous Court of Appeal cases have ruled that such policies are indeed lawful.

Also, under California law, an employer that permits customers to pay tips by credit card is required to pay employees the full amount of the tip that the customer wrote on the credit card slip, without any deductions for credit card payment processing fees or costs that may be charged to the employer by the credit card company. Payment of tips made by customers using credit cards must be made to the employees no later than the next regular payday following the date the customer authorized the credit card payment.

While the Supreme Court’s decision in the Lu case may not directly affect your tip pooling policy, employers need to be careful and make sure that their tip policies and practices comply with California law.
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