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Is a “Service Charge” a “Gratuity”? San Francisco Court Revives Banquet Server’s Lawsuit


In California, the law states that when a customer leaves a “gratuity,” that money is the “sole property of the employee or employees to whom it is paid, given, or left for.” The employer cannot keep any portion of the gratuity for itself, nor can it force the employees to share the money with managers or other non-service workers.

But what if an employer imposes a “service charge” on a customer’s bill? Should this money be treated the same as a “gratuity”? Or does the employer have some flexibility to distribute the service charge to employees other than those who directly provide service to the customer?

First District: Employers Do Not Have “Unfettered Freedom” to Relabel Gratuities as Service Charges

A recent published decision from the California First District Court of Appeals, O’Grady v. Merchant Exchange Productions, suggests that under certain circumstances, a “service charge” may fall within the legal definition of a “gratuity.”

The plaintiff in O’Grady worked as a banquet server and bartender at a facility operated by the defendant. According to the plaintiff’s complaint, the defendant routinely imposed a 21 percent “service charge” on its banquet customers. The defendant kept some of this money, and distributed the remainder to “manager and other non-service employees.”

The plaintiff alleged this service charge was really a “gratuity,” and that by law all of that money belonged to the service employees, including herself. The plaintiff therefore sought to certify a class action on behalf of all affected service workers, and sought damages for the defendant’s violation of California law.

The defendant objected to the lawsuit on the grounds that a service charge “is not a gratuity as a matter of law.” The defense cited two previous California Court of Appeal decisions in support of this argument. The trial judge accepted the prior decisions as binding precedent and dismissed the plaintiff’s complaint.

The First District reversed. The appeals court noted that the terms “tip,” “gratuity,” and “service charge” are “commonly used as if they are interchangeable synonyms.” But in practice, the term “service charge” is a “protean term of no fixed meaning.” That is to say, many businesses use the term to mean something other than a gratuity or tip.

But at the same time, the First District said an employer does not have the “unfettered freedom” to simply relabel a gratuity as a “service charge” in order to deprive service employees of that money. Indeed, the First District said neither of the two cases cited by the defendant and the trial court should be read to require otherwise.

That said, the appeals court did not definitively state that the service charge in this case was a gratuity covered by California law. The First District noted that the plaintiff was effectively trying to expand the scope of the law’s reach by declaring “service charges” are gratuities based on the “custom in the hospitality industry,” rather than “private initiative” or “legislative command.” But the court said the plaintiff should have the opportunity to develop her claims further in the trial court.

Get Legal Advice If Your Employer Is Withholding Tips

There is never any excuse for an employer to keep employee gratuities. That money belongs to the employees, period. If you suspect your employer is not following the law in this area, you should contact an experienced California employment law attorney right away.


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* Cathleen Scott is licensed to practice in Florida only.

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