Restaurant Large Party Service Charges: A Boon For Wait Staff? A Hidden Risk For The Restaurant?

A typical notation on restaurant menus says something like this:“An 18% service charge will be added for parties of 8 or more.” It is a safe bet that most customers assume that the money is a guaranteed “tip” that goes to the wait staff. One might also assume that, if it does, this mandatory “tip” doesn’t affect the wait staff’s hourly wage. Surprisingly, both assumptions may not be true in California.

There is little authority in California to answer the first question and what there is conflicts. There is only one reported California Court of Appeal decision that addresses the question of whose money the mandatory service charge is. In 2010, Garcia v. Four Points Sheraton LAX looked this issue in the context of a Los Angeles city ordinance that required hotels near Los Angeles International Airport to pass along mandatory service charges to workers who rendered the services for which the charges have been collected. The hotels had a practice of keeping the mandatory service charges. The California Labor Code mandates that “gratuities” go to the wait staff and not management.

Garcia decided that a mandatory service charge is not a “gratuity” as defined by the Labor Code (“…any … money … that has been … left for an employee by a patron … over and above the actual amount due the business for services rendered or for goods, [or] food … sold or served to the patron”) precisely because it was a mandatory “service charge” included in the invoice. By definition, it is not “over and above the actual amount due the business for services rendered.” Thus, absent the LA Ordinance, the hotels were free to keep the service charges paid.

The Department of Labor Standards Enforcement (the state’s enforcer of wage and hour laws) has expanded Garcia’s ruling on its website’s FAQs, “Is a mandatory service charge considered to be the same as a tip or gratuity? No, a tip is a voluntary amount left by a patron for an employee. A mandatory service charge is an amount that a patron is required to pay based on a contractual agreement or a specified required service amount listed on the menu of an establishment. … Such charges are considered as amounts owed by the patron to the establishment and are not gratuities voluntarily left for the employees.” See http://www.dir.ca.gov/dlse/FAQ_TipsAndGratuities.htm.

The California Board of Equalization states: “A mandatory payment designated as a tip, gratuity, or service charge is included in taxable gross receipts, even if the amount is later paid by the retailer to employees.” See http://www.boe.ca.gov/formspubs/pub115/.

In December 2013, the United States District Court in San Francisco dismissed Garcia as “dicta” and held that Uber Technologies (the app-based taxi service) was not entitled to keep money automatically included in its bill and advertised as a “gratuity” of a set amount (20%). The court decided the Labor Code’s definition of “gratuity” was ambiguous. It construed the phrase “actual amount due the business” to mean the sum that the business tells customers is the amount charged for the service rendered or items sold. Any amount above that, even if mandatory, would be a “gratuity.” The court also considered the fact that Uber called the fee a “gratuity” rather than a “service charge” to be significant because Uber was telling customers that the fee was a tip in excess of the cost of the ride.

It may be a “best practice” to give the mandatory fee to wait staff in any case. But here’s the hidden trap for the restaurant (or any other business). According to the same DLSE FAQ, unlike the voluntary tip a customer my leave, the mandatory nature of the fee makes any distribution to the employees a “bonus” to be “included in the regular rate of pay when calculating overtime payments.”

If the DLSE is correct, many restaurants and other businesses are routinely failing to pay the correct amount for overtime worked in any week where a “mandatory service charge” is paid by a customer. One and one half times the employee’s “hourly” wage will always be less than 1-½ times the “hourly plus bonus” wage.

A prudent owner of any business charging a percentage or set fee for “service” should consider whether that fee should be paid to employees and, if paid, whether it is added into the gross wages for the week for purposes of calculating overtime.

A typical notation on restaurant menus says something like this:“An 18% service charge will be added for parties of 8 or more.” It is a safe bet that most customers assume that the money is a guaranteed “tip” that goes to the wait staff. One might also assume that, if it does, this mandatory “tip” […]