For California employers, particularly those in the hospitality and service industries where tipping is customary, remaining compliant with all wage and hour laws has always been paramount. However, a significant development in the state’s labor law landscape, Senate Bill 648, has intensified the focus on one particular area: the handling of employee gratuities. This new law, which becomes effective January 1, 2026, fundamentally strengthens enforcement of California's existing protections against tip theft, and all businesses must now review their gratuities policies and practices in light of the heightened risk of litigation and penalties.

The core of California’s tipping wage law, as enshrined in Labor Code section 351, has always been clear: gratuities are the sole property of the employee or employees for whom they are left, and an employer or its agent cannot take any part of a tip, nor may they deduct or credit any tip against an employee's wages. Section 351 also states that if a patron pays a tip via credit card, the employer must remit the full amount to the employee, without deducting any credit card processing fees or costs charged to the business. Payment of these credit card tips must be made no later than the next regular payday. While these rules were already in effect, employees seeking unpaid gratuities could only do so through civil actions.

SB 648 changes the game by expressly granting the California Labor Commissioner the authority to investigate, issue a citation, or file a civil action for gratuities that are unlawfully taken or withheld. This means employers who fall short of their obligations regarding tips can face an administrative process that is both quicker and more direct than a civil lawsuit. The stakes are raised further by the introduction of specific civil penalties, including fines of $100 for employee per pay period for an initial violation and $250 for each subsequent violation, all in addition to the actual tips and wages owed.

Crucially for employers, SB 648 also enhances the right of employees to bring a direct civil lawsuit in court to recover unlawfully withheld tips and associated penalties. Furthermore, employers are now under a strict mandate to maintain accurate records of all gratuities received and to make those records available for inspection by the Labor Commissioner upon request.

With this new, dual-pronged enforcement power – both administrative and civil – employers must immediately review their tip pooling arrangements to confirm they comply with existing law, ensuring that managers, supervisors, and owners are not participating and that the distribution is fair and reasonable among the service employees. The message from the state is unmistakable: tip theft is being treated with increased severity, and California employers must audit their gratuity practices to eliminate any potential liabilities before the new wave of enforcement begins.

This publication is published by the law firm of Ervin Cohen & Jessup LLP. The publication is intended to present an overview of current legal trends; no article should be construed as representing advice on specific, individual legal matters. Articles may be reprinted with permission and acknowledgment. ECJ is a registered service mark of Ervin Cohen & Jessup LLP. All rights reserved.