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August 2010

California Supreme Court Holds There is No Private Right of Action Under Labor Code Section 351

In the recently decided case of Louie Hung Kwei Lu v. Hawaiian Gardens Casino, Inc. ("Hawaiian Gardens") the California Supreme Court held that there is no private right of action under California Labor Code section 351 ("section 351").  Section 351, which states that any gratuity left by a customer for an employee is "the sole property of the employee or employees to whom it was paid, given, or left for," has previously been held not to extend to so-called employer-mandated tip pooling, whereby an employer mandates that tipped employees must share their gratuity with all other employees who provided service.  The Court in Hawaiian Gardens, therefore, limited its review solely to whether a private right to sue exists under section 351.

In Hawaiian Gardens defendant Hawaiian Gardens Casino, Inc. ("the Casino") employed plaintiff Louie Hung Kwei Lu ("Lu") as a card dealer.  The Casino had a tip pooling policy that required dealers to deposit fifteen to twenty percent of their tips into a "tip pool bank account" which the Casino would later distribute to other employees who provided service to the Casino's customers.  Dealers, such as Lu, were allowed to keep the remaining eighty to eighty-five percent of their tips, and the Casino ensured no amount was deducted from the dealer's minimum hourly wages.  More, the Casino specifically excluded employers, managers, and supervisors from receiving any money from the tip pool.

Lu then brought a class action against the Casino alleging that the Casino's tip pooling policy amounted to conversion of his tips and violated the California Labor Code.  The trial court granted the Casino's motion for judgment on the pleadings for the Labor Code section 351 cause of action holding it did not contain a private right to sue.  After Lu appealed, the Court of Appeal reversed the trial court's holding as to the section 351 ruling.  The California Supreme Court then granted a limited review to determine "whether section 351 gives employees a private right of action. "  

As a precursor to its analysis, the Court noted that a violation of a California statute does not automatically give rise to a private right of action.  The California Legislature must have specifically manifested its intent to create such right to sue under the statute.  The Court said the first step is to examine the statute to determine if there are "clear, understandable, unmistakable terms, which strongly and directly indicate that the Legislature intended to create a private cause of action."  If the statute does not contain such language, then the Court must resort to the legislative history.

Following this analysis, the Court first turned to the plain language of section 351.  The Court noted that section 351 did contain some language suggesting an employee may bring an action to recover misappropriated tips.  Specifically, the Court referenced the following portion of section 351 for this proposition: "Every gratuity is hereby declared to be the sole property of the employee or employees to whom it was paid, given, or left for."  The Court, however, determined that such statutory language does not "unmistakably" evidence a legislative intent to create a private right of action.  More, the Court also reasoned that other statutory provisions relating to section 351 indicated that section 351 was to be enforced through public action, not private action.  Thus, the Court determined the plain language of the statute was indeterminate.

The Court next turned to the legislative history of section 351.  The Court first noted that the predecessor to section 351 actually allowed employers to take a potion of a gratuity left for employees, or deduct such gratuities from their wages so long as notice was given. The language relating to "every gratuity" being the "sole property" of the employee was not added by the Legislature until 1973.  Based on this addition to the statute, the Court concluded that the Legislature added the "sole property" language to the statute simply to "confirm that the Legislature's ultimate goal was to prevent an employer from taking any part of an employee's gratuity?."  Thus, the legislative history of section 351 did "not reflect a legislative intent to give employees a new statutory remedy ..." 

Finally, in response to Lu's argument that "the only way an employee may recover any misappropriated gratuities would be through a civil action" the Court noted "to the extent that an employee may be entitled to certain misappropriated gratuities, we see no apparent reason why other remedies, such as a common law action for conversion, may not be available under appropriate circumstances." 

In conclusion, the Court held that "section 351 does not contain a private right to sue."  However, as noted above, the Court left open the possibility of employees recovering misappropriated gratuities through other causes of action.  More, the Court specifically stated it was limiting its holding to the narrow issue of whether or not section 351 contained a private right to sue, and issued no opinion regarding the validity of employer mandated tip pooling. 

All in all, the Court's ruling can be seen as a reaffirmation of the limits of private rights of action under the Labor Code unless specifically authorized by statute or legislative history.  In addition, the Court left in place the validity of employer mandated tip pooling.  Therefore, the case can be seen as a positive development for employers in general, and specifically those in the service industry that utilize a tip pooling procedure.


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