Attention hospitality employers. Is that charge you add to a guest check a service charge (typically a set amount added to a guest check in lieu of a tip)? Or an automatic gratuity (such as a set amount for a party of 8 or more)? Or a true tip/gratuity (an actual discretionary amount left by the guest for the service employees)?

In California, if it is a tip/gratuity, under California Labor Code Section 351, it belongs to the employees and the employer can’t keep any of it (even for managers working the event or party). Plus, it is not taxed as a wage, and is not included in the regular rate for overtime purposes.

However, if it is an automatic gratuity or a service charge, then it is considered a wage in California. Accordingly, it is taxed, and is included in the regular rate for overtime purposes. And if your guest facing documents are clear, the House or management can keep part of it, with some important exceptions.

One caveat applies to hotels covered under the LA Hotel Ordinance; for those Hotels (and associated restaurants and banquet facilities), 100% of the service charge must go to the service employees.

Another caveat applies to charges that aren’t clearly defined. In a recent California case (O’Grady v. Merchant Exchange Productions) the banquet facility added a “service charge” to guest bills, and kept part of it for the House and management. Allegedly, it was not clear on documents to guests that 100% of the service charge was not going to the employees, and that some went to management. The attorneys representing the server (and the purported class) argued that the service charge was really a gratuity that should have gone entirely to the employees, and that none of it should have been retained by the House or management (because tips belong to employees in CA). The Court of Appeal in California allowed a putative class action by servers to go forward on the issue of whether that service charge was actually a misnamed gratuity that was improperly distributed (and kept from employees) in violation of CA law.

As my partner, Jordan Pace, points out in this helpful Alert, the risks for treating the designation of the charge wrong are high. That’s why all hospitality employers should make sure their categorization of charges is correct, and that all guest facing documents are clear and unambiguous. Any lack of clarity could make you the next test case in litigation, which is great for us lawyers, but not so great for your business.