Whether a banquet for two hundred people or simply a take-out delivery, service charges have become a common part of food bills.  Yet contrary to common belief, such charges are often not tips for servers, but fees kept in whole or part by an employer. However, lawsuits by employees alleging service charges were actually gratuities owed to them have risen dramatically since a 2008 ruling by the New York Court of Appeals. For employers unfamiliar with the changes that followed, or who continue to use old forms, this can prove to be very costly.

New York Labor Law § 190-d provides that “No employer... shall... retain any part of a gratuity or of any charge purposed to be a gratuity for an employee.”  In the seminal case of Samiento v. World Yacht Inc., 10 N.Y. 3d 70 (2008), the NY Court of Appeals found that services charges and automatic gratuities added to meal and banquet bills were charges “purported to be gratuities,” because the reasonable patron would understand the charge to be collected in lieu of a gratuity.  Thereafter, the new standard was codified by the NY Department of Labor in the Hospitality Wage Order (“Wage Order”) in 2011.

The Wage Order creates a rebuttable presumption that any charges not for food, beverages, etc. is a gratuity. It further provides that such charges “must be distributed in full as gratuities to the service employees or food service workers who provided the service.”  However, employers may still charge and retain an “administrative fee,” provided the fee is clearly identified and states what percentage, if any, goes to the staff.  However, the employer bears the burden of proving the fee falls within the exception and is not what a reasonable person would consider a gratuity.

The stakes in service charge cases can be extremely high.  Many unpaid gratuities claims are litigated as class action suits, and employers may be liable for the full amount of any service charges collected over a period of several years, plus attorney’s fees, pre-judgment interest, and liquidated damages, potentially doubling the amount already owed. One high-end establishment, Thomas Keller’s Per Se, recently settled a case for $500,000.  Now Donald Trump’s “Trump SoHo” hotel now faces a similar lawsuit, as do well-known venues such as Madison Square Garden and Yankee Stadium. Big or small, potential service charge lawsuits are something of which all hospitality employers should be aware.