The trending practice in restaurants of charging a fixed percentage at the end of each bill has been met with push back from customers. Customers may not recognize that the charge benefits customers because it keeps food costs reasonable. As the cost of food, labor, and supplies rise, it is hard for restaurants to stay profitable while keeping their menu prices reasonable. One way restaurants keep food costs reasonable is by applying a service charge to offset the increasing costs of maintaining a restaurant.
Restaurant owners and hoteliers need to understand the law surrounding the issue so that when met with push back from their customers, they can confidently inform their customers that the charge is mandatory.
There are different terms to describe the practice of charging a fixed percentage amount to each check (i.e., 20% added to each bill for parties of 6 or more). For this memorandum, the term “service charge” will be used to refer to such practice, which is the accepted term, as per the Internal Revenue Service (“IRS”) 2017 Fact Sheet.
The 2017 IRS Fact Sheet provides guidance on the issue but uses the term “automatic gratuities.” That “automatic gratuities” are service charges, not tips. A required amount that a customer must pay is a service charge. Thus, the real difference is between a service charge and a voluntary tip, and the laws surrounding the two may provide some clarity.
A voluntary tip is money received by an employee from a customer for services rendered. 34 Pa. Code § 231.1. The monies received from a voluntary tip belong to the employee and are an amount wholly determined by the customer. In contrast, the definition of a service charge is a mandatory fee that an employer may charge to a customer for services that an employee renders. 34 Pa. Code § 231.1. The difference is that a service charge is a fee the employer imposes on the customer.
Under the Fair Labor Standards Act (“FLSA”), an example of amounts not received as tips is a compulsory charge imposed on a customer. Even if the employer distributes the money to the employer, it is not counted as a tip. 29 CFR 531.55. Additionally, under the FLSA, in its provision to define “tip,” the Legislature specifically added the following: “[i]t is to be distinguished from payment of a charge, if any, made for the service.” 29 CFR 531.52. The key difference under the FLSA is that a tip is voluntary rather than imposed by the employer on the customer.
Federal and state law view a tip as an optional charge subject to the customer’s control. A service charge is a compulsory charge that the customer must pay. Even though the customer must pay the charge, employers should provide clear notice to the customer to reduce confusion and in accordance with the Commonwealth’s Unfair Trade Practices and Consumer Protect Law (“UTPCPL”).
Compliance
Under the UTPCPL, the Commonwealth prohibits “unfair or deceptive acts or practices,” which includes any practice of deceptive conduct that creates a likelihood of confusion or misunderstanding. 73 P.S. section 201-1(4)(xxi). It is important that employers are clear and concise regarding what fees they are charging customers. Similarly, to avoid confusion and provide notice, a service charge should be posted on the menu with a percentage assessed and, on the receipt, reflecting the dollars and cents charged.
Additionally, if the service charge is wholly for the employer, include language that informs customers that the charge does not include a tip to be distributed to the employee. This again clearly informs customers of the charge and protects employees from not receiving a tip from customers.
Summer M. Pannizzo
Attorney
Learn more about Summer here.
