, Employment Law Update: Service Charges are not Tips, Abrahams Kaslow & Cassman LLP | Attorneys at Law

By Evyn Perry and Harvey Cooper

Service charges are not tips For as long as people can remember, restaurants and bars have been charging customers service charges. These charges range anywhere from 10% to 20% and are
tacked on the final bill. Some employers use the charge to help cover overhead costs, while others distribute all or some of the charges among employees.

Recently, employees across the country have contested that the charges are actually tips, and therefore cannot be used towards satisfying minimum wage requirements.

A quick glance at federal regulations will show that such an assertion is patently incorrect. Title 29 of the Code of Federal Regulations § 531.55 (a) explains that “A compulsory charge for service, such as 15 percent of the amount of the bill, imposed on a customer by an employer’s establishment, is not a tip…”.

Nonetheless, a group of wait staff brought a lawsuit against a Miami steakhouse claiming the portion of the service charge paid by the employer to them was a gratuity from the customer and could not be considered a wage.

Finding in favor of the steakhouse, the 11th Circuit reminded the employees that a payment is a tip when it is provided, at the sole discretion of the customer as a “gift or gratuity in recognition of some service performed for the customer”. With respect to the service charges, the court also found that whether and how much to pay was not determined by the customer at all.

While the plain language of federal law gave us the outcome of this case before it was brought, the United States Court of Appeals for the Eleventh Circuit decision offers employers much-needed clarity on tips and service charges as they pertain to complying with wage and hour laws.