Is A Service Charge A Gratuity?

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Service Charge

When it comes to a service charge, if it walks like a duck and talks like a duck, then it must be a duck. That is unless it isn’t and it turns around to sue you for seven figures. Such is the state of the “service charge” in the restaurant business. It is quickly becoming one of the most litigated issues in the industry. Restaurants see it as an added revenue stream. Servers see it as unbridled greed. The courts are seeing it as illegal. The guests rarely see it at all.

In order to understand the concept of a service charge, you must understand the origins. Hotels have traditionally added a service charge to the tabs of large private functions and banquets. Since the guest generally does not tip these servers directly, it has generally been assumed by the guests to be a gratuity or tip for the staff. Some years ago, hotels realized that the service charge was not part of most guest’s value equation. This means that they could reduce the front end prices by a small percent and add it to the service charge without notice. This lead to what has traditionally been the servers’ tip to be split between the hotel and the servers.

Hotels are allowed to do this for two reasons. The first is that hotels require guests to sign long contracts for their events in advance. While the guests rarely read the entire contract, most all will include a section explaining with a great deal of contrived complexity that the service charge is not a tip. The second reason that hotels can get away with this is that they do not claim the tipped employee tax credit. The hotels would pay their servers the full minimum wage as well as a portion of the service charge.

Somewhere along the line, restaurant companies learned of this and decided to start using service charges as well. Where they failed to follow the hoteliers’ example was in the two areas stated above. While they require a service charge, they rarely inform their guests that the restaurant will be keeping a percentage of that fee. They also in many states continue to take the tipped employee tax credit for their servers. This tax credit allows them to apply the employee’s tips to cover a portion of the minimum wage other employers are obligated to pay. This is why in some states servers still make as little as $2.13/ hour and why in 44 states they make less than the minimum wage. The law defines a tip as monies given directly to the person providing the service. When the employer takes a portion of the money, as is the case with a service charge, it is no longer considered a tip. This means that there is no tip for that party and the employee is owed at least the full minimum wage.

To clarify, a service charge is only permissible when the guest is aware that it is not a tip and when the employer is not claiming a tip credit against the employee’s minimum wage.

From personal experience and anecdotal stories, I would estimate that 95% of restaurants are currently violating this law. For a number of years restaurants have considered it a grey area. If nothing else, they assumed that their staff would not be able to mount a legal challenge large enough to win a case against their corporate lawyers. The restaurants that believed this have guessed wrong. Just last month Brinker International subsidiary, Maggiano’s Little Italy, reached a $1.3 million settlement for this practice. This covers employees in Massachusetts, but leaves the door open for a larger national class action suit. I wrote last month about a lawsuit regarding the same issue that was lost by the Four Seasons hotel chain. Restaurant companies can no longer count on their size to flagrantly violate this law.

I write for several different audiences on this network of blogs. I believe this topic is relevant to all of them. Let me end with a few words of advice for each.

If you are a restaurant patron who is required to pay a mandatory gratuity or service charge, please clarify what percentage is going to the service staff. Feel free to express your feeling about this deceptive practice to the person planning your event. One of the coolest things you can do for your servers is to leave any additional gratuity you choose to leave in cash. This is the easiest way to make sure that the money goes to the people you intend for it to go to.

If you are a restaurant manager or owner, obey the law. This issue has been ruled on by a number of courts and all of them have come down on the side of the servers. There is no more grey area. This is an illegal practice and one that you cannot afford to continue. According to their website, Maggiano’s has one restaurant in Massachusetts. Unless you can afford this size of judgment against your restaurant, you should stop this deceptive practice immediately.

If you are a restaurant server, you must be aware of your legal rights. You cannot expect your employer to make you aware of ways that they are violating your rights. It is foolish to believe that simply because a restaurant has a policy that it is legal. Educate yourself and then educate your management. A simple google search of “service charge lawsuits” will provide you a wealth of examples. Give your restaurant time to change their policies. If they refuse, it may be time to consult with an expert.

I am not trying to be a trouble starter. It is my sincere wish that service charges were never introduced into the restaurant industry. Everyone must follow the law though. If you refuse to follow the law, there are consequences. The law has been clearly defined and you are now aware of it. Choosing to ignore this law is done at your own peril.

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4 Responses to Is A Service Charge A Gratuity?

  1. Nadia Morey November 12, 2011 at 12:38 am #

    Is there any connection to restaurants that deliver food and any charges that go along with that? What is the standard practice in the industry for these employees? Do they make minimum wage? Do they get paid mileage if using their own car? Do they get any part of the “service fee or delivery fee” charged by the restaurant?

    • David Hayden November 12, 2011 at 12:53 am #

      I would say that depends. I’ve never worked someplace that does delivery routinely enough to have some one. When we did offsite delivery, it was just whoever they asked to do it. Several times for big deliveries that were set up through the banquet coordinator did have a service charge. Almost anytime you make arrangements in advance with a banquet or events manager there will be a service charge.

      I was recently wondering the same thing about people hired as delivery drivers. I am not sure if that small delivery charge goes to them or not. If anyone has ever been a delivery driver, I would love for them to fill us in on that.

  2. brettgard November 14, 2011 at 3:42 pm #

    One of my co-workers went to a very nice up-scale restaurant that was including this “service charge” apparently on every check. When my co-worker asked about it the server wasn’t even aware of the charge and had to ask his manager about it. The clever thing about the charge was it was very minimal only 3-4% of the total amount of the bill so it appeared to look like an additional tax on alcohol the only problem is Nevada doesn’t have a separate tax on alcohol.

    • David Hayden November 14, 2011 at 4:12 pm #

      Now that is absurd. I would probably not return to a restaurant that did that.

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