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Are Service Charges Considered Tips?

Are Service Charges Considered Tips?

A new California court decision found that in some situations, service charges may be considered tips.

Are Service Charges Considered Tips?

In the midst of the COVID-19 pandemic, more Americans than ever before are relying on deliveries of goods and services. Instacart, Postmates, Shipt and similar businesses are overwhelmed with requests for deliveries as individuals comply with stay-at-home orders and limit their contact with the outside world.

Most of these businesses charge a delivery or service fee, and then a tip can be added for the shopper or driver. In most cases, these service charges don’t go to the workers themselves. Instead, these individuals may be paid a flat rate per trip, plus any tip given to them by the customer.

According to a California employment lawyer, a new decision by the California Court of Appeals may change this reality. In this case, a bartender at a banquet facility filed a lawsuit against the company based on the way that it handled service charges. At this banquet facility, a mandatory 21% service charge was included in every customer contract. Some of this service charge went to managerial employees who did not serve food or beverages. The company retained the remainder of the charge.

The bartender filed a class action lawsuit against the banquet facility, on his own behalf as well as for other employees who serve food and drinks there. In the lawsuit, the bartender claimed that the company had violated the California Labor Code by failing to treat the service charge as a tip or gratuity, and distributing it to all of its employees who actually served food and beverages.

Under the California Labor Code, a gratuity is “any tip, gratuity, money, or part thereof that has been paid or given to or left for an employee by a patron of a business over and above the actual amount due the business for services rendered or for goods, food, drink, or articles sold or served to the patron.”  Employers are prohibited from collecting or taking any gratuity that is paid or given to an employee by a patron.

In its decision, the Court of Appeals noted that the term “service charge” may ave many different meanings, depending on the context. For example, a service charge may be imposed instead of a gratuity, or it may be a charge for something else entirely, like maintaining a website or use of the facility itself. The Court determined that a service charge may be considered a gratuity in specific situations. Here, the Court found that because the service charge was intended as a substitute for a tip, the company had violated California law by retaining this money.

This case does not apply directly to deliveries made by gig employees who work for services like Instacart. However, its finding (that a service charge could be considered a gratuity based on the facts of a particular situation), may ultimately lead to a determination that the service charges imposed by these businesses should go to the workers — not the company itself.

If your employer retains service charges, a California employment lawyer can help you determine if they may be violating California law. At PLBSH, we have more than 40 years of experience helping employees navigate the employment law system. We are dedicated to achieving justice for each of our clients. Contact our firm today at (800) 435-7542 or info@plbsh.com to schedule a consultation with a member of our team.

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