In the service industry (such as at a restaurant), a service charge is a mandatory extra charge that is added to a bill, while a gratuity (also known as a tip) is a voluntary amount that a customer may choose to add to a bill. Service charges and gratuities are treated differently under California labor law.
Why It Matters
Under the California Labor Code, an employer cannot keep a gratuity – it belongs to the employee. For the purpose of calculating overtime, however, a gratuity is not counted towards the employee’s regular pay.
If the amount is classified as a service charge, by contrast, the employer may keep it. If any of it goes to the employee, it is considered wages and it must also be counted towards wages for the purpose of calculating overtime.
Exceptions
Certain exceptions apply, for example:
● If the business is covered by the LA Hotel Ordinance, all of the service charge must be allocated to the employees and the employer can keep none of it.
● A California court may give the benefit of the doubt to employees when the employer does not make it clear to the guests whether a given charge is a gratuity or a service charge. California law requires employers to offer disclosures to their customers clarifying the status of a “service charge.” This disclosure should be placed on a menu or check to avoid confusion.
How to Tell the Difference between a Gratuity and a Service Charge
The general rule is that if a charge is mandatory (if the customer doesn’t have the option of not paying it, regardless of the quality of the service), then it is classified as a service charge and not a gratuity. Note that it doesn’t matter what you call it. Calling it a “gratuity” doesn’t make it a gratuity if it’s mandatory.
Although an employer is allowed to keep all of a service charge unless an exception applies, even then, intracompany policy may allocate some or all of this amount to the employee. If so, the employer will be expected to abide by its own policy. Additionally, some California municipalities may allocate some or all service charges to the employees. Keep in mind that sales tax also applies to service charges.
Voluntary gratuities belong to the service staff (either individually or through a tip pool), are not classified as wages, and are not subject to sales tax. Like wages, however, they are subject to other taxes such as social security tax.
We’re Here to Help
Operating a business in the service industry involves a myriad of decisions, most of which involve legal implications at some point or another. Some of these legal implications are highly counterintuitive and could lead to trouble unless you are fully aware of them in advance. At CKB Vienna, we’re here to help.
Contact us by calling or visiting one of our offices in Rancho Cucamonga, Riverside, and Los Angeles, or simply fill out our online contact form to schedule a consultation.