Whether the extra sum your customer is paying is a service charge, automatic gratuity or a true tip will have significant consequences on employee wages and your business’ ability to keep any portion of the fee.
A service charge is typically a set amount added to a check in lieu of a tip. An automatic gratuity is a set amount, such as for a large restaurant party or catered party. A true tip is an actual discretionary amount left by the customer for the service employees.
How these charges are described and allocated has legal consequences. In California, if it is a true tip under California Labor Code section 351, the money belongs to the employees. The employer cannot keep a portion of it (even for managers). In addition, the amount of true tips is not included in the regular rate of pay for overtime purposes, meal premium, rest premium or sick pay.
If the amount is an automatic gratuity or service charge it is then considered a “wage” in California. It is therefore taxed and included in the regular rate for overtime and other purposes. If the customer disclosures about the automatic gratuity or service charge are clear, then the employer can keep a part of it with some exceptions such as the Los Angeles Hotel Ordinance and the terms of certain union contracts.
If the sums are not distributed in the appropriate manner, the business risks claims by customers and employees.
If you charge customers service charges, automatic gratuities or your employees receive tips of any sort, check with your business attorney to ensure that you have clearly identified the charge for your customers and properly accounted for it with your employees.
The information presented is not intended to be, and does not constitute, “legal advice.” Because each situation varies, and only brief summary information is provided here, you should not use this information as a basis for action unless you have independently verified with your own counsel that it applies to your particular situation.
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