Service Charge Litigation Redux

Twitter icon
Facebook icon
Google icon
LinkedIn icon
Pinterest icon
February 15, 2011

By Carl Sacks, Catersource Director of Consulting

This column is the most recent in an ongoing series covering legal issues facing the catering industry. Please talk to your own attorney if you are concerned about how these issues affect your business.

Over the past several years, we have on several occasions discussed the unfortunate reality that the hospitality sector, including the catering industry, has been targeted for various types of litigation. Almost all caterers that are around long enough will eventually be hit with nuisance litigation such as slip and fall lawsuits. These will typically be defended by your liability insurance carrier and are rarely significant.

Of greater concern are suits that are brought targeting catering companies for practices that have been accepted industry standards for many years. The primary focus for one category of these lawsuits has been the distribution of percentage add-ons to catering invoices. Whether these are called service charges, gratuities, administrative fees or tips, the one thing they have in common is that they are calculated as a percentage of the client invoice.
For many years, this line item, which I€™ll call here a service charge, was not much of an issue in the off-premise catering industry. This was because most off-premise caterers charged either shift pay or hourly pay for front-of-house staff. But over the past decade, many full service caterers have begun to charge a percentage in addition to or instead of shift or hourly pay.

On the basis of solid legal advice at the time, the rule of thumb in the industry was that as long as it wasn€™t called a gratuity, the money collected could be distributed or withheld at the discretion of the company. Since most catering waiters make substantially more than minimum wage, unlike restaurant servers, there was no issue of a tip credit. Many caterers used the percentage to add to the overall revenue to the company, rather than allocating it specifically to paying front-of-house staff.

The on-premise and banquet industry has traditionally been somewhat different; most banquet facilities have traditionally charged a percentage and paid some or all of it to the staff. Usually this has been done either directly as lump sum payout on top of an hourly wage, or indirectly by subsidizing a higher hourly rate.

In the old days, withholding service charges from servers as a punitive measure at banquet facilities was not at all unusual, but that practice has nearly disappeared. However, some sharing of service charges with the house, or with managers or salespeople, is still common for on-premise caterers.

In the early 2000s, several lawsuits relating to the distribution of service charges were brought against companies in the New York City area. The original targets of these suits were several high-profile restaurant and excursion boat companies, but caterers were soon added to the list of possible defendents as well.

Initially, the suits were primarily based on the principle that only front-of-house serving staff was eligible to receive service charges. Managers, kitchen personnel and the venue itself were and are specifically precluded by law from participating in the distribution of gratuities. A number of these suits were found for the plaintiffs, including a suit against World Yacht of New York, which seems to have established the precedent on which many or most of these claims will be decided in the future.

Based on the outcome of these lawsuits, there are several important rules that should apply immediately to all caterers based in New York State. The importance of these cannot be overstated; we are aware of at least one if not several caterers that already have been sued based on the precedents set in these cases.

At the beginning of this year, a Hospitality Wage Order from the New York State Department of Labor went into force. It covers a number of topics, but service charges are prominent among them:

  1. The Hospitality Wage Order provides that there must be a rebuttable presumption that any charge in addition to charges for food, beverage, lodging, and other specified materials or services, including but not limited to any charge for €œservice€ or €œfood service,€ is a charge purported to be a gratuity. Under the New York State Labor Law, a charge which a restaurant (or other facility) claims to be a gratuity must be distributed in full as gratuities to the service employees or food service workers who provided the service (emphasis added).
  2. A charge for the administration of a banquet, special function, or package deal must be clearly identified as such and customers must be notified that the charge is not a gratuity or tip. However, the employer has the burden of demonstrating, by clear and convincing evidence, that the notification was sufficient to ensure that a reasonable customer would understand that such charge was not a gratuity. Under the Hospitality Wage Order, adequate notification includes a statement in the contract or agreement with the customer, and on any menu and bill listing prices, that the administrative charge is for administration of the banquet, special function, or package deal, is not a gratuity, and will not be distributed as gratuities to the employees who provided service to the guests. The statements must use ordinary language which can be readily understood and appear in a font size similar to the surrounding text, but no smaller than a 12-point font.

To summarize, in order for any add-on charge not to be considered a gratuity, no matter what it is called, the burden is on the employer to prove that a reasonable customer would understand that it is not a gratuity. If the employer cannot prove this, then the charge must be distributed in full only to the front-of-house staff that served the banquet or catered function. We are not attorneys, but this seems to us to be a very vague formulation for an important requirement.

It is clear that all caterers within New York State (the largest state by catering volume in the United States) must follow this new ruling immediately. But, how does this impact caterers and banquet operators outside of New York?

Every state has its own labor laws, but precedents set in large states often are used by courts in other states to decide cases. As an example, the Starwood Hotels group recently settled for $1.65 million a lawsuit filed in Massachusetts (Malinski v. Starwood Hotels & Resorts Worldwide, Inc.) that was based on the same presumption€”that if there is a percentage added to a banquet invoice, the client will reasonably expect that it is a gratuity that will be distributed to the front-of-house staff.

There are resources available to help you stay on top of this rapidly evolving situation. There is a new website called, which is apparently being supported by a law firm that specializes in suing restaurants, caterers, hotels and other hospitality entities. Berke-Weiss and Pechman LLP is the name of the firm. The website is an important resource for you to make certain that you are in compliance with the law.
No matter what you as an operator think of these lawsuits and how they are being decided, we strongly recommend that if you add any kind of percentage to a banquet or catering invoice, you add text stating clearly that this is not a service charge or gratuity, and is not used for paying the serving staff. It is better to be safe than sorry, particularly since it seems that in a number of these lawsuits, not just compensatory but also punitive damages have been awarded.

In future columns we will cover other legal issues relating to staff compensation.

Loading Comments...