‘Service charges’ can create problems for employers

State and federal wage and hour laws allow employers to pay a sub-minimum wage (commonly known as a “tip credit”) to service workers, such as servers, bartenders, bellhops and parking valets, but only if those workers are spending most of their time on tip-generating work and making enough in tips to bring them over the minimum wage. Violation of these laws can result in lawsuits and fines. Some employers may try to make things more efficient by automatically adding a “service charge” to customers’ tabs. But any employer that does this had better be sure all the proceeds are going to actual service workers, or the employer could land in hot water.

This happened to a catering hall operator in California. The employer added a 21-percent charge to every food and beverage tab and labeled it a “service charge,” but didn’t pass the money on to service workers. Instead, it kept part of the charge and doled out the rest to managers and other nonservice employees, presumably under the assumption that because it wasn’t labeled a “tip” or “gratuity,” customers would tip the server separately.

One of the servers took the company to court, asserting that customers wrongly assumed the service charge was going to bartenders and waitstaff, resulting in service personnel getting stiffed. She alleged that this violated California labor laws.

The employer argued in response that a service charge can never amount to a gratuity. A trial judge dismissed the worker’s claim.

The California Court of Appeals reversed. The court said California’s tip law was meant to ensure that service workers, not employers and nonservice workers, received the gratuities customers intended them to receive and the employer’s practice undermined this. It also noted that any reasonable customer would see the service charge and assume it was a built-in tip for their server or bartender.

This case was decided under California law, so talk to an employment attorney to review your policies according to the law where you live.

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