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Etheridge v. Reins International California

March 27, 2009


APPEAL from a judgment of the Superior Court of Los Angeles County, Elizabeth A. White, Judge. Affirmed. (Los Angeles County Super. Ct. No. BC360725).

The opinion of the court was delivered by: Croskey, J.


Tip-pooling, a practice by which tips left by patrons at restaurants and other establishments are shared among employees, is a common practice throughout California and the nation. No California statutes expressly address the practice. In this case, restaurant servers challenge the legality of a mandatory tip-pooling arrangement, whereby, as a condition of their employment, the servers must share tips with certain other employees at the restaurant. While the servers do not contest the requirement that bussers share in the tip pool, they challenge the inclusion of employees who do not provide "direct table service." The trial court sustained the demurrer of the restaurant without leave to amend, on the basis that employees who do not provide direct table service may, nonetheless, participate in mandatory tip pools. We agree and, therefore, affirm.


Defendant Reins International California, Inc. (Reins) operates several restaurants in California. Brad Etheridge and Hannah L. Hannah are, or were, employed by Reins as servers; they brought their complaint on behalf of the class of all persons who are, or have been, employed as servers by Reins within the four years immediately prior to the filing of their complaint.*fn2 The complaint alleged that Reins has a mandatory tip pooling policy by which its servers are required to "tip out" cert categories of Reins's employees who do not provide direct table service. Specifically, it is alleged that servers are required to pay a share of their tips to the kitchen staff, bartender, and dishwashers.

Believing that requiring them to share tips with employees who do not provide direct table service violates the Labor Code, Etheridge brought suit. The operative complaint is his second amended complaint.*fn3 He alleges three causes of action for unlawful and unfair business practices (Bus. & Prof. Code, § 17200), based on the allegedly unlawful and unfair tip pooling practices described above.*fn4 The fourth cause of action sought civil penalties under Labor Code sections 2698 and 2699, for violations of the Labor Code.*fn5 Each cause of action was based on Labor Code section 351, governing gratuities, and Etheridge's interpretation of that statute as prohibiting mandatory tip pooling benefitting employees who do not deliver direct table service to patrons.*fn6

Reins demurred, arguing that Labor Code section 351 does not limit tip pooling participation to employees who provide direct table service. Reins argued that as long as tips were not shared with management (which Etheridge did not allege), the tip pool was permissible.

On August 9, 2007, the trial court sustained the demurrer without leave to amend. The court's order stated, "the entire action is dismissed with prejudice." On October 5, 2007, Etheridge filed a notice of appeal. Etheridge ultimately filed two notices of appeal in this case. After the first notice of appeal was filed, this court indicated that the appeal was in default for failure to pay the filing fee. In the apparent belief that the first notice of appeal was premature in the absence of a judgment, he chose not to pursue the first appeal, which was dismissed by this court on November 7, 2007. Instead, Etheridge returned to the trial court and obtained a judgment. Judgment was entered on December 27, 2007; notice of entry was served on January 8, 2008. On January 10, 2008, Etheridge filed his second notice of appeal, specifically indicating that he was appealing from the December 27, 2007 judgment.

Reins filed a motion to dismiss the second appeal, on the basis that a second appeal could not be taken from the same appealable order. We denied the motion without prejudice to its renewal based on, among other things, copies of the relevant documents from the trial court record. Reins did not renew its motion; instead, Reins included the relevant documents in a respondent's appendix and briefly addressed the issue in its respondent's brief.

Oral argument was heard on August 13, 2008. After argument, the court invited amicus curiae briefing on the issue of the legality of a mandatory tip pool requiring tips to be shared with employees who do not provide direct table service. The California Employment Lawyers Association filed an amicus curiae brief on behalf of Etheridge. The California Restaurant Association and the California Hotel & Lodging Association filed a joint brief as amici curiae on behalf of Reins. The parties were permitted to file responsive briefs to the briefs of the amici.


There are two issues presented by this appeal: (1) whether Etheridge is barred from proceeding on the second notice of appeal by the dismissal of the first appeal; and (2) whether a mandatory tip pool, whereby restaurant tips are shared with employees who do not provide direct table service, is violative of Labor Code section 351. (Grodensky v. Artichoke Joe's Casino (March 11, 2009, A119035, A119036) ___ Cal.App.4th ___ [2009 WL 607400, *11-*15.)


1. The Appeal May Proceed

The August 9, 2007 order sustaining the demurrer states that "the entire action is dismissed with prejudice." It is signed by the trial court. "All dismissals ordered by the court shall be in the form of a written order signed by the court and filed in the action and those orders when so filed shall constitute judgments and be effective for all purposes . . . ." (Code Civ. Proc., § 581d.) As a judgment, a dismissal is appealable. (Code Civ. Proc., § 904.1, subd. (a)(1).) Etheridge's first notice of appeal, taken from the August 9, 2007 dismissal order, was therefore properly taken from a judgment. His belief that the appeal had been prematurely taken from a non-appealable order was mistaken; he should have pursued the appeal, rather than allow it to be dismissed for failure to submit the filing fee.

Etheridge's second notice of appeal was filed on January 10, 2008, after he had obtained a document entitled "Judgment." There is no question that if we construe this notice of appeal as being taken from the earlier-filed dismissal,*fn7 the appeal is timely.*fn8

The only question is whether the dismissal of the first appeal, for failure to pay the filing fee, bars Etheridge from pursuing a second appeal of the same dismissal. It does not.

Guidance is supplied by our Supreme Court's decision in Swortfiguer v. White (1901) 6 Cal.Unrep. 779. In that case, the plaintiff filed a notice of appeal from a superior court judgment. While that appeal was pending, the trial court attempted to modify its judgment; the plaintiff then filed a notice of appeal from the modified judgment, and attempted to pursue the second (but apparently not the first) appeal. As the purported modification to the judgment was made without jurisdiction, the modified judgment was void. The court therefore dismissed the second appeal on defendant's motion. The plaintiff was ultimately permitted to pursue her appeal with the first notice of appeal and the record she had filed in the second appeal. Defendant's argument against this was considered "too technical to prevail against the consideration that the plaintiff, having a valid appeal and a printed transcript of the record on file, ought not to be deprived of a hearing by the harmless mistake she made in seeking to prosecute the second appeal." (Ibid.) Similar considerations apply here. Etheridge filed two notices of appeal, as did the plaintiff in Swortfiguer, and mistakenly chose to proceed on the notice that was invalid. He should not be deprived of the right to appeal by the harmless mistake he made in seeking to prosecute the second, instead of the first, appeal. Were it necessary, this court would issue an order, nunc pro tunc, vacating the dismissal of the first appeal, in order to enable him to proceed to a resolution on the merits.

2. Tip Pool Participants Are Not Limited To Employees Who Provide Direct Table Service

a. Standard of Review

"In reviewing the sufficiency of a complaint against a general demurrer, we are guided by long-settled rules. 'We treat the demurrer as admitting all material facts properly pleaded, but not contentions, deductions or conclusions of fact or law. [Citation.] We also consider matters which may be judicially noticed.' [Citation.] Further, we give the complaint a reasonable interpretation, reading it as a whole and its parts in their context. [Citation.] When a demurrer is sustained, we determine whether the complaint states facts sufficient to constitute a cause of action. [Citation.] And when it is sustained without leave to amend, we decide whether there is a reasonable possibility that the defect can be cured by amendment: if it can be, the trial court has abused its discretion and we reverse; if not, there has been no abuse of discretion and we affirm. [Citations.] The burden of proving such reasonable possibility is squarely on the plaintiff." (Blank v. Kirwan (1985) 39 Cal.3d 311, 318.)

b. The Practice of Tipping

The practice of "tipping the providers of personal service has endured and is now a well-accepted part of our day-to-day lives." (Searle v. Wyndham Internat., Inc. (2002) 102 Cal.App.4th 1327, 1331.) While a tip is "entirely gratuitous, entirely subjective and very personal," (ibid.) anecdotal evidence suggests that people tend to tip because they believe that they " 'don't get very good service if [they] don't add a tip.' " (Id. at p. 1336.)

Before discussing the legislative history of the relevant statute, a brief explanation of two practices related to tipping is helpful. The first is a practice known as a "tip credit," by which an employer credits a certain amount of the tips received by an employee against the employee's wages. In other words, when using a tip credit, the employer pays the employee less than minimum wage, with the understanding that the employee's tips will make up the difference. As will be discussed at length, tip credits against minimum wage are permissible under the federal Fair Labor Standards Act (29 U.S.C. § 203(m)); tip credits against minimum wage were once permitted under California law, but were subsequently prohibited by statute. (Henning v. Industrial Welfare Com. (1988) 46 Cal.3d 1262, 1270-1275.)

The second practice, the one specifically at issue in this case, is mandatory tip pooling.*fn9 In tip pooling, some of the tips received by tipped employees are shared with other employees at the business. This case raises the issue of precisely which other employees may participate in a tip pool. In one type of tip pool, the pool is designed to spread the risk of low tipping patrons among all tipped employees; thus, only tipped employees may participate in tip pools. In another type of tip pool; the pools are designed to share tips with non-tipped employees who are considered deserving of tips, but who, for some reason (perhaps tradition, or location) are generally not tipped by patrons.

The practices of tip crediting and tip pooling are not unrelated. One can conceive of a situation in which a tip-crediting employer: (1) requires tipped employees to submit to the tip pool all tips received in excess of the amount necessary to guarantee that the employee receives the equivalent of minimum wage; and (2) uses the tip pool and the tip credit to avoid paying all of its non-tipped employees minimum wage as well. Indeed, the California Industrial Welfare Commission (IWC) discovered, "during the time that tip credit was allowed[,] . . . tip sharing was required to such an extent that the traditional tipped employees were subsidizing the minimum wages of other classifications." (Industrial Welfare Com. v. Superior Court (1980) 27 Cal.3d 690, 729.) This appears to be one of the reasons why tip crediting was ultimately prohibited in California. (Id. at pp. 729-730.)

Even though an employer can no longer use tip sharing to subsidize minimum wages of non-tipped employees, it is possible that an employer could use tip sharing to subsidize market wages of non-tipped employees, resulting in the same evil. Thus, when considering tip pooling, it is important to make certain that the employer is not using the tip pool as a de facto tip credit against market wages.

c. The History of Tip Crediting and Tip Pooling in California

The history of tip crediting and tip pooling in California was set out at length in Henning v. Industrial Welfare Com., supra, 46 Cal.3d at pp. 1270-1275. The history began in 1917, with a statute providing that an employer who required an employee to pay the employer any portion of the tips received by the employee was guilty of a misdemeanor. (Id. at p. 1270.) In 1918, the California Supreme Court struck down that statute as violative of substantive due process and freedom of contract. (Id. at pp. 1270-1271 [citing In re Farb (1918) 178 Cal. 592].) In the course of its opinion, the Supreme Court had noted that, if there were any fraud on the public regarding the disposition of tips, it could be easily overcome by legislation requiring the employer to post a notice explaining the terms under which the employer was to receive the benefit of the gratuities paid. (Ibid.)

In an apparent response to this ruling, the Legislature enacted a statute in 1929 which provided that, if the employer took any of the tips from its employees, or credited tips against the employee's wages, the employer was required to post a notice explaining the disposition of the tips, and the extent to which the employer was taking a tip credit against the wages due to the employees. (Henning v. Industrial Welfare Com., supra, 46 Cal.3d at p. 1271.) The statute specifically expressed that its purpose was to prevent a fraud upon the public in connection with the practice of tipping. (Ibid.)

Eventually, this statutory requirement was codified in the Labor Code. Labor Code section 351, enacted in 1937, provided that an employer taking a portion of its employees' tips or crediting them against wages was required to post a notice regarding the disposition of tips. Labor Code section 356 expressed that the purpose of the article was to prevent fraud on the public in connection with the practice of tipping. (Henning v. Industrial Welfare Com., supra, 46 Cal.3d at p. 1272.)

In 1968, the IWC adopted a wage order establishing a tip credit system, allowing tips to be credited against minimum wage to a certain extent (at the time, 20 cents per hour). (Henning v. Industrial Welfare Com., supra, 46 Cal.3d at pp. 1272-1273.) Beginning in 1972, efforts began in the Assembly to eliminate the tip credit system. Bills were introduced to eliminate the "notice" language written in Labor Code section 351, and replace it with language providing that every gratuity is declared to be the sole property of the employee to whom it was paid or given. While the bills were not initially successful,*fn10 their legislative history indicated that the effect of the proposed language would have been to eliminate the IWC's wage order permitting a tip credit against minimum wage. (Id. at pp. 1273-1275.)

Ultimately, in 1975, the attempts to amend Labor Code section 351 to eliminate the tip credit were successful. A memorandum by the Assembly Committee on Industrial Relations on the successful legislation indicated that the basis of the bill " 'would appear to be that tips or gratuities are given for individual excellence of service above and beyond the basic duties of the employment, and as such, the employer has no vested right to consider tips a part of wages.' " (Henning v. Industrial Welfare Com., supra, 46 Cal.3d at p. 1275 [quoting Assem. Com. on Labor Relations, Mem. on Assem. Bill No. 232 (1975-1976 Reg. Sess.) p. 1.].)

Labor Code section 351 was amended to provide, "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." (Italics added.) Labor Code section 356, which provided that the purpose of the article was to prevent fraud on the public in connection with the practice of tipping, remained untouched.

With a minor exception, the language of Labor Code sections 351 and 356 in 1975 is the current language of these provisions.*fn11 In 1988, the Supreme Court was required to determine whether the current language of Labor Code section 351 permitted the IWC to adopt a two-tier minimum wage, with a lower wage for employees who customarily receive tips. The court concluded that the two-tier minimum wage was prohibited by Labor Code section 351. (Henning v. Industrial Welfare Com., supra, 46 Cal.3d at p. 1265.) The employers had argued that a two-tier minimum wage did not create a fraud on the public, and Labor Code section 356 indicated that preventing fraud on the public was the purpose of Labor Code section 351. The court acknowledged the language of Labor Code section 356, but reasoned that "the prevention of fraud cannot be deemed the sole purpose of [Labor Code] section 351 in its current form." (Id. at p. 1280, emphasis original.) Instead, the court focused on the legislative intent of the 1975 amendment to Labor Code 351. Considering the legislative history, the court concluded that the legislative intent of the current version of the statute is as follows: "the Legislature has declared that tips belong to the employee and the IWC may not permit an employer to obtain the benefit of such tips by ...

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