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A Mandatory Gratuity or Service Charge is Not a Tip and Need Not be Shared with Employees

As many people know, under the Fair Labor Standards Act, persons who work for tips are called tipped employees and the employer may pay such employees less than the required minimum wage. For a the employer, this is called the "tip credit."  This applies to most restaurant employees, such as waiters, bussers, etc. However, the law also states that such employees must be able to keep all of the tips received and the employer cannot keep any portion of those tips.

However, nowadays, many restaurant establishments are implementing what is called a "mandatory gratuity" or a mandatory "service charge" (such as 18%) and the question is how is that treated? Under the law, a mandatory gratuity that is imposed by the restaurant establishment is not considered a tip and, as such, the employer may keep all of the mandatory gratuity and not share any portion of it with the employee. The question then becomes whether the "mandatory gratuity" is really mandatory. That seems like a circular question, but if the customer has the ability to pay less than the mandatory gratuity (because, for example, the customer complains), then all of a sudden, that mandatory gratuity becomes a bona fide tip that only the employee can keep.

This happens quite a bit because many restaurant establishments put on their menu language such as the following:

"For your convenience, a suggested service charge is added to all bills. Please ask your server if you would like this to be removed."

From the restauranteur's perspective, it makes the mandatory gratuity something that is not so draconian, but what this language does is make the "mandatory gratuity" a tip, which the employer may not keep and must give to its employees. On the other hand, if the "mandatory gratuity" is not negotiable and not capable of being removed by the customer, then the law considers that the mandatory gratuity or service charge is not a tip and the employer may keep all of it or, as is the case usually, shares a portion with the employees.

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If you have any questions regarding employment law or how tips should be handled, please do not hesitate to contact me, Santiago J. Padilla, Esq., either at 800-483-7197, or [email protected]

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