What wage and hour records must a small employer keep when payroll includes tips or cash?

Small employers rarely lose a wage claim on the law. They lose it on the paper. A tip jar, a cash envelope and a schedule written on a whiteboard are normal in many businesses, urban corridors and suburban shops alike, and each can be run cleanly. The records are what show it. This is part 5 of the Urban and Suburban Employer Series, which starts with part 1. The rest are part 2, part 3, part 4, part 6 and part 7.

I am not accusing any employer or community of anything. I grew up in Oakland, I have worked with employers in urban and suburban settings, and I hold a J.D. and an MS-HRM without being an attorney. My view is plain: a clean record is the cheapest defense a small employer has, and it is also the fastest route to fixing an underpayment when one turns up. Accurate records protect the worker and the owner.

Is paying employees in cash legal in California?

Yes. The Labor Commissioner’s paydays FAQ says wages may be paid in cash, by check or otherwise. What cash does not change is everything around it. You must still give an itemized wage statement each time, and you must still keep complete payroll records. Labor Code section 212 restricts certain check and voucher practices, and it does not ban cash.

The risk with cash is not legality. It is that cash leaves no trail unless you build one. Without a wage statement and a time record, an employee and an employer can remember the same week differently, and the employer has nothing to show. If a worker is paid in cash, the wage statement and the time record are what prove the amount.

Taxes follow wages, not the payment method. I did not find a separate state page on cash wages, so confirm withholding and reporting with a CPA or the EDD, and keep your payroll file the same way for cash workers as for everyone else.

What must a wage statement show?

Under Labor Code section 226(a), each wage statement must show these items.

• Gross wages earned and total hours worked, with limited exceptions.
• Piece-rate units and the rate, if any workers are paid that way.
• All deductions, and net wages earned.
• The pay period dates.
• The employee’s name and the last four digits of the Social Security number, or an employee ID number.
• The employer’s legal name and address.
• Every hourly rate in effect during the period, and the hours worked at each rate.

You must keep a copy of each statement and the deduction records for at least 3 years, at the workplace or a central California location. An employee can ask to inspect or copy their records, and you have 21 calendar days to respond. The penalty for a first violation is $250 per employee, and $1,000 per employee for each later one, under section 226.3. The Labor Commissioner can decline to penalize a first violation caused by a clerical error or inadvertent mistake.

My PAGA penalty exposure calculator shows how quickly wage statement errors can multiply across pay periods and employees.

How do you record tips so they stay the employee’s money?

Start from the rule. Under Labor Code section 351, tips belong to the employees. You cannot keep them or count them toward wages. Credit card tips must be paid in full, with no processing fee deducted, by the next regular payday. The Labor Commissioner’s tips and gratuities FAQ explains the same points.

Then keep the paper. Labor Code section 353 requires accurate records of tips received, and the Labor Commissioner can inspect those records at any reasonable time. A simple daily log works.

• Record each day’s card tips and cash tips separately, with the date and shift.
• Record how each day’s tips were split and who received what.
• Record the date each person was paid their share.
• Have the person who counted and the person who paid initial the entry.

For federal reporting, IRS Publication 531 says employees report tips of $20 or more in a month to their employer by the 10th of the next month, and it describes a daily tip record. The publication calls Form 4070 historical and now carries the steps itself. The EDD’s tip guidance in form DE 231T says reported tips are subject to withholding. My guide to restaurant HR compliance covers tip pooling and service charges in more depth.

How long must you keep payroll and time records?

Keep them at least three years. Labor Code section 1174 requires you to keep, for not less than three years, records of the hours worked each day, the wages paid and any piece-rate units and rates. It also requires a roster with each employee’s name and address, and the ages of minors, at a central California location or at each work site.

Wage statement copies carry their own three-year clock under section 226. In practice I tell employers to keep payroll, time and tip records together for one full set of years and to keep personnel files longer. Do not shred a record because a pay period feels old. A claim can reach back, and PAGA cure rules also look back three years. Store the records in a place you can retrieve within the 21-day window if an employee asks.

A worker paid in cash is held to the same retention period as everyone else. Put the cash worker’s time sheet, signed receipt and wage statement in the same folder as the rest of your payroll.

What are the most common recordkeeping gaps?

Across small employers I see the same few gaps, and none of them are exotic.

• Time recorded by hand at the end of the week instead of daily, so hours look rounded or reconstructed.
• Meal break times not recorded at all, which makes it impossible to show a break happened. My meal and rest break guide explains what to record.
• Cash paid with no wage statement, so the pay exists only in memory.
• Tips tracked in a notebook that no one reviews, or pooled with no written method.
• Off-the-clock work such as opening, closing, cleaning or a quick phone call that never reaches a timecard.
• Wage statements missing an hourly rate or the hours at each rate when an employee had two rates in one period.
• Workers who may be misclassified as contractors, which removes records altogether. See contractor or employee under the ABC test.

Look at the list and mark the ones that sound like your business. You do not need to feel bad about the ones you mark. You need to know which ones you have.

How do you correct a past gap before it becomes a claim?

Start with the facts, then fix the process, then talk with a professional about the past. Stop the gap going forward first: begin daily time records, wage statements and tip logs from today, and tell the person responsible for each.

For the past, find out what was missed and for whom. The state’s PAGA reform gives employers a path to cure certain violations after a notice arrives, including wage statement errors, and the Labor and Workforce Development Agency publishes the procedures, including an administrative cure route for employers with fewer than 100 employees. A cure means correcting the violation and making employees whole, with interest. A cure can only be used once in 12 months for the same violations. The agency’s PAGA FAQ sets out the steps and deadlines.

The better move is to fix a gap before any notice. Do not guess at the numbers or the law for your facts. An employment attorney can tell you how a past gap applies to you, and a CPA can handle payroll tax corrections. If you want a records check before you call either, my final paycheck guide shows how a small gap becomes a larger penalty at separation, and my California HR audit reviews time, pay and tip records together.

This week, check one pay period for each of the seven gaps above, start the tip log and daily time record if you do not have them, and put your wage statement template next to section 226(a) to confirm every item appears. Part 7 of this series gives you a ten-question method to find the rest.

The records are the last link in the workforce management chain.

Sources

• California Labor Commissioner, Paydays FAQ, read October 25, 2026
• Labor Code section 226 and section 226.3, read October 25, 2026
• Labor Code section 1174, section 351 and section 353, read October 25, 2026
• California Labor Commissioner, Tips and Gratuities FAQ, read October 25, 2026
• IRS Publication 531, Reporting Tip Income (Rev. December 2024), read October 25, 2026
• EDD, DE 231T, Information Sheet: Reporting Tips, read October 25, 2026
• California Labor and Workforce Development Agency, PAGA FAQs, read October 25, 2026

McKinley holds a J.D. but is not a licensed attorney. Articles here are general information, not legal advice. For your specific situation, talk with an employment attorney.

Data current as of October 2026. Sources are linked where each figure appears.