Service charge

Service fees paid at California Banquet Hall may be a gratuity due to workers

A 21% service charge added by a banquet hall operator to the establishment’s food and beverage bills may be a tip, which California law requires to go to non-executive employees who serve food and beverages. beverages, a California appeals court ruled.

The trial court wrongly dismissed the case after ruling that a mandatory duty charge can never be a gratuity, the appeals court said. The appeals court sent the case back to the lower court to consider whether the venue operator could legally keep part of the fees.

The plaintiff is a banquet server and bartender at a ballroom in San Francisco. She filed a class action lawsuit claiming her employer violated California law by keeping a portion of service charges added to food and beverage bills.

The plaintiff claimed that the service charge was a “gratuite” and therefore California law required the operator of the banquet hall to distribute the entire amount to non-management employees of the banquet service.


California Labor Code defines “gratuitousness” as any “tip, gratuity, or money” that “has been paid or given or left to an employee by a patron of a business in addition to the actual amount due to the business for services rendered or for goods, food, drink or articles sold or served to the patron. »

The law stipulates that an employer cannot accept any gratuity that a patron pays to an employee. Rather, the law states that each gratuity is “declared to be the exclusive property of the employee or employees to whom it was paid, given, or left for.”

The law adds that an employer who allows customers to use credit cards to pay tips must pay employees the full tip that the customer put on the credit card slip, without deducting the processing fee that the credit card company can charge the employer.

[SHRM members-only toolkit: Complying with California Wage Payment and Hours of Work Laws]

The court noted that although the terms “tip”, “tip” and “service charge” are commonly used as if they were interchangeable, the terms “service charge” in fact have no fixed meaning. Rather, the court said it only makes sense from the surrounding context.

For example, in the context of retail installment contracts, “service charge” generally refers to interest on an unpaid installment or late payment fee. In the context of utilities, a service charge is a fee charged for starting, maintaining, or shutting down gas, electricity, or water.

“In short,” the court said, “merely calling something a ‘service charge’ rarely explains what it is or why it is imposed.”

The court then considered what the term means in the food and beverage industry. The trial court had relied on two previous cases to rule that a “service fee” can never be a gratuity under state labor law. Although both of these cases occurred in the food and beverage industry, the appeals court explained, both employers in these cases imposed service charges, but also told customers they could leave a “tip or gratuity” to their servers. In both cases, the employers therefore distinguished between the service charge and the tip that the customer could choose to add, the court said. In this case, the venue owner merely imposed the service charge and did not mention that customers could also tip servers.

The two previous cases do not categorically establish that a service charge, even mandatory, can never be considered a gratuity, the appeals court concluded.

Further, according to the court, the plaintiff suggests that it is customary in the hospitality industry to treat sums designated as service charges as tips for employees. The plaintiff should be allowed to prove that this is the case, the appeals court said as it sent the case back to the lower court.

O’Grady v. Merchant Exchange Productions Inc.Calif. Ct. App., No. A148513 (June 27, 2019).

Professional pointer: In that case, the court did not rule that the mandatory service charge collected was entirely gratuities. He said only that the trial court was wrong in deciding that they definitely weren’t and that the plaintiff was entitled to try to prove her claim that the servers were entitled to all monies collected.

Joanne Deschenaux, JD, is a freelance writer in Annapolis, Md.