Is That Payment A Tip?

Is that charge added to a guest check a service charge; a set amount added the check in lieu of a tip an automatic gratuity (i.e., a set amount for a party of 8 or more) or is it a true tip/gratuity (an actual discretionary amount left by the guest for the service employees)?

There is a big difference under California law. If it is a tip/gratuity, under California Labor Code Section 351, it belongs to the employees and the employer cannot keep any of it, and it is not included in the employee’s regular rate for overtime purposes.

If it is an automatic gratuity or a service charge, then it is considered a wage. It is then taxed and is included in the regular rate for overtime purposes. In addition, if your documents are clear, the management can keep part of it, with some
important exceptions.

There are exceptions based on local ordinances. For hotels and their associated restaurants and banquet facilities covered under the Los Angeles Hotel Ordinance, 100% of the service charge must go to the service employees.

The charges must be clearly defined. In the recent California case of O’Grady v. Merchant Exchange Productions the banquet facility added a “service charge” to guest bills, and kept part of it for the House and management. It was allegedly not clear on documents given to guests that 100% of the service charge was not going to the employees, and that some went to management. The attorneys representing the purported class of servers contended the service charge was really a gratuity that should have gone entirely to the employees, and that none of it should have been retained by the House or management. The Court of Appeal in California allowed the putative class action by servers to go forward on the issue of
whether that service charge was actually a misnamed gratuity that was improperly distributed (and kept from employees) in violation of CA law.

There is substantial risk in improperly treating the designation of the charge. Hospitality employers need to be sure their categorization of charges is correct, and that all guest documents are clear and unambiguous. Lack of clarity could result in substantial claims against the business for wage law violations. Before instigating a set service charge or fee, check with your business attorney to ensure the ultimate result is what you envisioned.

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.