Do we have to distribute a mandatory service charge from patrons to our employees as a tip?

No. A mandatory service charge is not a tip. It is a required amount set by the business and belongs to the employer, not the employees. The DLSE defines a tip as a voluntary amount left by a patron, while a mandatory service charge is a required payment and not a gratuity (Labor Code Section 350(e)).

If an employer chooses to distribute any portion of a service charge, it is discretionary and treated as wages (included in the regular rate for overtime).

Employers should not mislead customers into believing the charge is a tip, as this may constitute fraud under Labor Code Section 356.