On August 9, 2010, the California Supreme Court gave restaurant and other hospitality employers a victory in Lu v. Hawaiian Gardens, 50 Cal. 4th 592 (2010), by holding that California Labor Code Section 351 does not contain a private right to sue. Therefore, a tipped employee in California cannot sue his employer in court for a violation Labor Code Section 351.
Tip-Pooling Before Hawaiian Gardens
Interestingly, the Court in Hawaiian Gardens limited its opinion only to the question of whether a private right to sue existed under Labor Code Section 351. The Court explicitly withheld judgment on the more fundamental question of whether tip pooling in general violates Labor Code Section 351. Therefore, whether existing tip pooling agreements are valid requires an analysis of Labor Code Section 351 and the cases that have interpreted it.
California Labor Code Section 351 states:
“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.”
In Leighton v. Old Heidelberg, Ltd., 219 Cal. App. 3d 1062 (1990), the Court analyzed Labor Code Section 351, and its legislative history, and concluded that nothing in the statute prohibited employer mandated tip pooling. To the contrary, because tip pooling encourages employees to give the best possible service which in turn enhances the employer’s reputation and increases its business, the Court reasoned that allowing tip pooling actually furthers the policy goals of Labor Code Section 351. The Court then analyzed the language of Labor Code Section 351 and concluded that the employer’s tip pooling policy was legal because the employer: (1) did not share in any of the pooled tips; (2) did not credit the tips against the minimum wage owed to the employee; and (3) distributed the pooled tips only to non-management employees who “directly” contributed to the service of that patron.
Thirteen years later, in Jameson v. Five Feet Restaurant, Inc., 107 Cal. App. 4th 138 (2003), the Court examined who constituted the “employer” for purposes of Labor Code Section 351. The tip pooling policy at issue in Jameson mandated that pooled tips be shared with “floor managers.” But the Court found that the floor managers in Jameson had clear authority to hire and fire and to supervise, direct, and control other employees’ acts within the meaning of Labor Code Section 350. The Court found that the floor managers were the legal agents of the employer, and thus the tip pooling policy in Jameson was illegal under Labor Code Section 351.
In Etheridge v. Reins Int’l California, Inc., 172 Cal. App. 4th 908 (2009), the Court considered which employees were in the chain of “direct” table service (and, thus, could lawfully share in the pooled tips). The employee in Etheridge argued that his mandated tip pool was illegal because he was forced to share his tips with kitchen staff, dishwashers, and bartenders, none of whom he claimed provided “direct” table service to patrons. The Court rejected the employees’ argument as “too narrow a reading of Leighton.” The Court pointed out that, in many cases, patrons have no way of tipping a kitchen employee or dishwasher even if the employee wanted to. Therefore, the Court held that all employees who contribute to the patron’s service may participate in a tip pool, even if those employees did not provide “direct table service.”
In Budrow v. Dave & Buster’s of California, Inc., 171 Cal. App. 4th 875 (2009), the Court was again confronted with the question of which employees in the chain of service could properly share in the pooled tips. In Budrow, the employer had a tip pooling policy that required servers to share 1% of their gross sales with bartenders and other non-management employees. The tipped employee argued that this policy violated Labor Code Section 351 because bartenders did not provide any table service at the restaurant. The Court rejected that argument and held that bartenders may lawfully participate in a mandatory tip pooling policy, even if they did not provide table service. Importantly, in reaching this decision, the Budrow Court explicitly rejected the more narrow position of the California DLSE and Labor Commissioner that only employees who provide “direct” table service can be included in a tip pool.
Finally, in Chau v. Starbucks Corp., 174 Cal. App. 4th 688 (2009), the Court considered an employer’s policy which required equitable apportionment of collective tips placed into a tip box. The Chau Court distinguished this case from a classic tip pooling case because here the employer was not technically “pooling” any tips given to anyone specifically. Here, the employer was merely exercising discretion in how collective tips were apportioned. The Court concluded that Starbucks’ policy of apportioning collective tips to non-management, service personnel based on the time worked by each employee was fair and equitable. Thus, the Chau Court reversed a lower’s court’s ruling that found Starbucks’ policy in violation of Section 351.
The Impact of Hawaiian Gardens
As a result of the California Supreme Court’s decision in Hawaiian Gardens, California employees have fewer available remedies when trying to recover unpaid tips. No longer can a tipped employee sue an employer in court for a violation of Labor Code Section 351.
However, if the alleged tip pooling violation rises to the level of “conversion,” or if the employee alleges that the tip pooling violation amounts to an “unfair business practice” in violation of California Bus. & Prof. Code Section 17200, then a court may award damages, restitution, or some other legal or equitable remedy. See e.g., Grodensky v. Artichoke Joe’s Casino, 171 Cal. App. 4th 1399 (2009).
Finally, as the California Supreme Court explained in Hawaiian Gardens, even without a private right of action for employees, California’s Department of Industrial Relations (DIR) has explicit statutory authority to investigate employers’ tip pooling policies. If the DIR investigates and finds that an employer’s policy violates Labor Code Section 351, that employer can be charged with a misdemeanor and (i) fined up to $1,000 or (ii) sent to jail for up to 60 days.
In short, even after Hawaiian Gardens, employers must pay careful attention to their mandatory tip pooling policies. Employers who have these policies should consult experienced counsel regularly so that the employer’s policy can be continually monitored to ensure compliance with Labor Code Section 351.