California Expands Protections for Tipped Employees —New Requirements for Employers Begin January 1, 2026

August 18, 2025

On July 30, 2025, Governor Newsom signed Senate Bill 648 into law, amending the Labor Code to strengthen protections for employee gratuities. Under the new law, if customer pays a gratuity by credit card, then the business must remit the full gratuity amount shown on the credit card slip to the employee, without any deductions for processing fees or other credit card costs. The gratuity must be paid to the employee no later than the next regular payday after the date the customer authorized the credit card payment.

The Labor Code defines “gratuity” as a tip, gratuity, or money that has been paid or given to or left for an employee by a patron of a business over and above the actual amount due for services rendered or for goods, food, drink, articles sold or served to patrons. It includes any amount paid directly by a patron to a dancer covered by IWC Wage Order 5 or 10.

The new law requires heightened record keeping requirements for employers of tipped employees. Employers must maintain accurate records of all gratuities and make them available to the Department of Industrial Relations upon request.

Starting January 1, 2026, the Labor Commissioner will have authority to investigate violations and issue citations and civil penalties, using the same enforcement procedures currently applied to wage and hour violations.

Action Steps for Employers

• Review Tip Policies: Ensure that your policy makes it clear that all gratuities—especially those paid via credit card—are paid in full to employees, without deductions, and on time.
• Update Payroll Procedures: Implement systems that guarantee timely tip payments by the next payday.
• Maintain Records: Retain thorough gratuity logs and supporting documentation for auditing or inspection by DLSE.
• Train Managers and Staff: Clarify that tipping time and distribution protocols comply with the updated law.
• Audit Tip Practices: Conduct internal self-audits now to identify and correct any potential violations prior to 2026.

If you would like assistance updating your businesses wage and gratuity policies, or conducting a compliance audit, Buchalter is here to help.

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