Back in 2019, I posted about the difference between a Service Charge, an Automatic Gratuity, and a Gratuity/Tip.
I explained that a service charge is typically a set amount added to a guest check in lieu of a tip. An automatic gratuity is a set amount, such as for a party of 8 or more, a buy-out or banquet. And a true tip/gratuity is an actual discretionary amount left by the guest for the service employees.
Well apparently that issue is quite relevant again, as a bunch of news stories recently reported on Los Angeles restaurants that tack on “service fees” but don’t necessarily explain them to customers’ satisfaction. As the Los Angeles Times reports, some restaurants tack on charges (often with a disclaimer), called healthcare surcharge, competitive industry compensation, and wellness fee.
As the Eater reports, Reddit users in Los Angeles have created a Google Sheet listing various restaurant service charges, noting restaurant names, neighborhoods, surcharge percentages, and more details, including notes from conversations with servers and how some restaurants allocate service fees.
How charges are described and allocated has legal consequences.
In California, if it is a tip/gratuity, under California Labor Code Section 351, it belongs to the employees and the employer can’t keep any of it (even for managers working the event or party). Plus, it is not included in the regular rate for overtime purposes (as well as for purposes of meal premium, rest premium and sick pay).
However, if it is an automatic gratuity or a service charge, then it is considered a wage in California. Accordingly, it is taxed, and is included in the regular rate for overtime (and other) purposes. And if guest facing documents are clear, the House or management can keep part of it, with some important exceptions. One exception is for hotels covered by the LA Hotel Ordinance; for them (and associated restaurants and banquet facilities), 100% of the service charge must go to the service employees. Another exception is for per the terms of certain union contracts. .
If charges are not distributed exactly as indicated, or there is confusion as to whether the Service Team is compensated or not, the establishment risks claims by both guests and employees.
That’s why all hospitality employers should make sure their categorization of charges is accurate, and that all guest facing documents (and employee communications) are clear and unambiguous. Any lack of clarity might be good for us attorneys, but not so good for your business.