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Employer Required Tip Pools: Are they Legal? How are they taxed?

Posted on April 2014 by S. Ward Heinrichs
Employer Required Tip Pools: Are they Legal? How are they taxed?

Are tip pools legal when required by an employer? The quick answer to that question is yes. But under both California law and federal law, the pool must meet certain legal requirements.

As a general rule tips are optional, freely given payments for service above and beyond the cost of the products being sold. The customer has the complete right to set the amount of the tip and may choose not to tip at all. The employer should have no say in the amount of the gratuity.

California Labor Code §§350-56 lays the legal foundation for tip pool requirements in California. The law forbids the employer from taking or sharing in tips (Labor Code §351), and employers must track all tips that they collect for employees (Labor Code §353). Employer mandated tip pooling is legal, but the house cannot share in the pooling arrangement. The tip pool must be fair and reasonable. Only those who are in the chain of service can be in the pool. For instance, an employer cannot require servers to include cooks and dishwashers in the pool.

Tips are taxable income. When tips are shared, who must pay the tax?

Technically, all persons who receive tips or a share of the tips must report it as income. However, a common practice is for the employer to allocate the entire tip to the server who waits on the table. In that case, even when the server shares the tip, the server is the only person who pays tax on the entire tip. The employers records do not show any other employees in the service chain as persons who receive tips, even though they actually do in tip pooling arrangements. Presumably, those employees who share the server’s tip as part of the chain of service escape tax liability because the employer’s records do not show them collecting any tips. In that case, the server unfairly pays tax on the portion of the tip that he or she did not actually take home.

S. Ward Heinrichs, Esq.
Employment Law Office of Ward Heinrichs
4565 Ruffner Street, Suite 207
San Diego, CA 92111
858-292-0792
(858) 408-7543 (fax)

Employment Law Office of WARD HEINRICHS

4565 Ruffner St. Suite 207 San Diego 92111

858-292-0792

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