Restaurants beware: new law may require change of tipping policies and procedures

Increases in minimum wages and other compensation laws have led many service-based businesses to dispense with tipping as a way to reduce the bottom line cost to their customers. For example, as the New York Times recently reported “an expanding number of restaurateurs are experimenting with no-tipping policies as a way to manage rising labor costs.”

If not implemented properly, however, attempting to eliminate tips may trigger liability to employees under California law.
It is well-settled for example that employers may simply implement a “no tipping” policy. An employer may also implement a “mandatory service charge” which it need not directly share with employees.

However, under Labor Code § 351, to the extent any “tip” is included as part of a transaction, it is the sole property of the employee. Thus, if an employer advertises to customers that a “tip is included” in the price of a service it implies that the employer is adding a tip to the price and passing it along to the employee. If the employer doesn’t actually pay such an additional amount to the employee it may be liable for converting this advertised “tip.”

Indeed, this theory was recently endorsed in O’Conner v. Uber Technologies, 2015 WL 5138097 (N.D. Cal. 2015), in which the district court granted class certification to such a claim for tip conversion.

Plaintiffs have cited extensive evidence that Uber has consistently and uniformly advertised to customers that a tip is included in the cost of its fares (i.e., evidence that Uber “takes or receives” a gratuity). See, e.g., Docket No. 277, Ex. 12 (November 2011: “When the ride is over, Uber will automatically charge your credit card on file. No cash is necessary. Please thank your driver, but tip is already included.”) (emphasis added); Ex. 16 (November 2011: “All Uber fares include the tip ….”) (emphasis added); Ex. 13 (May 2012: “There’s no need to hand your driver any payment, and the tip is included.”) (emphasis added); Ex. 14 (January 2013: “With UberBlack, SUV, and UBERx there is no need to tip. With Uber TAXI we’ll automatically add 20% gratuity for the driver.”) (emphasis added); Ex. 15 (April 2015: “payment is automatically charged to a credit card on file, with tip included ”) (emphasis added). Uber does not even contest this fact in its papers.

Moreover, Uber has stipulated for the purposes of this litigation that, despite its representations that a “tip is included,” a “tip has never been part of the calculation of fares for either UberBlack or UberX in California.” See Docket No. 313–16 (emphasis added). That is, Uber essentially admits that despite making allegedly consistent and uniform representations to customers that a tip was included in all of its fares, Uber never actually calculated such a tip, and clearly never segregated and remitted any tip amount to drivers. Or, put differently, Uber has stipulated that it kept the entire amount of any tip that might be “included” in its fares. These facts, if proven at trial, will likely establish Uber’s uniform and classwide liability for violating California’s Tips Law.

The bottom line is that a “tip” is, by definition, an amount paid by the customer and received by the server. Thus, while employers are free to adopt no tipping policies they cannot falsely claim to customers that a “tip” has been “included” in the cost of the service when no additional amount is actually paid to the employee.