Many employers may—understandably—view gratuities as discretionary payments that customers leave in exchange for superior service. After all, federal wage and hour regulations define “tips” as “sum[s] presented by a customer as a gift or gratuity in recognition of some service performed.” 29 C.F.R. § 531.52 (emphasis supplied). The regulations also state that “compulsory charge[s] for service” are not tips. 29 C.F.R. § 531.55 (emphasis supplied).
But in some cases, a mandatory charge may qualify as a tip that employers must distribute to staff under state or local law.
By way of example, employers in the hospitality industry commonly assess mandatory “service” or “administrative” charges in connection with the administration of catered events, such as receptions and conferences. Depending on, among other things, the disclosures that the employers make to their customers, employees who provide services during the events may argue that state and/or local law requires their employers to distribute those charges to staff.
New York State is a prime (but not the only) example of a jurisdiction where this issue can arise.
In New York, employers cannot retain a gratuity or any “charge purport[ing] to be a gratuity for an employee.” NYLL § 196-d (emphasis supplied). Compulsory charges can qualify as charges “purporting to be a gratuity” if an employer represents or allows “customers to believe that the charges were in fact gratuities for their employees.” Samiento v. World Yacht Inc., 10 N.Y.3d 70, 81 (2008). Whether a mandatory charge purports to be a gratuity within the meaning of NYLL § 196-d turns on a holistic assessment of how a “reasonable customer” would understand the charge. Maldonado v. BTB Events & Celebrations, Inc., 990 F. Supp. 2d 382, 389 (S.D.N.Y. 2013).
In other words, if a reasonable customer would view a mandatory charge as a gratuity for staff—thereby theoretically reducing the likelihood that the customer would also provide a discretionary tip—the employer cannot retain it.
Notably, New York’s Hospitality Industry Wage Order creates a rebuttable presumption in the hospitality industry that any charge in addition to “charges for food, beverage, lodging, and other specified materials or services, including but not limited to any charge for ‘service’ or ‘food service,’ is a charge purport[ing] to be a gratuity.” N.Y. Comp. Codes R. & Regs. tit. 12, § 146-2.18.
The Wage Order also includes provisions specifically relating to charges...
