The Massachusetts Appeals Court recently held that Massachusetts General Laws ch. 149, § 152A (the Tip Statute) requires that even where a charge on an invoice is labeled “administrative fee,” the employer must provide an explicit disclaimer notifying customers that the fee is not a service charge to avoid liability as a matter of law. The Court found that the legislature’s intent in enacting the Tip Statute was to ensure that employees receive the service charges that customers intend them to receive, and employers therefore must affirmatively inform patrons that other fees are not service charges.

In this case, the defendants’ hotel imposed on its private function customers a charge of eighteen or nineteen percent of the amount invoiced for food and beverage. On function documents, this charge was designated an “administrative fee,” with no further written description. The plaintiffs, who worked as bartenders at these functions, argued that the fee constituted a “service charge” under the Tip Statute because it was “a fee that a patron . . . would reasonably expect to be given to” service employees, and that the defendants violated the statute by failing to distribute the fee to the plaintiffs.

The defendants contended that the mere designation of the charge as an “administrative fee” brought it within the Tip Statute’s safe harbor provision, which permits imposition of “any house or administrative fee in addition to or instead of a service charge or tip, if the employer provides a designation or written description of that house or administrative fee, which informs the patron that the fee does not represent a tip or service charge.” The defendants argued that this provision should be read as permitting an employer to provide either (1) a “designation” or (2) a “written description” of the fee expressly informing patrons that it is not a service charge.

After an analysis of the grammatical construction of the provision, the Court found that the defendants’ interpretation added words or punctuation not included by the legislature and that a more accurate reading is “a designation or written description of that house or administrative fee.” The Court noted that the term “administrative fee,” undefined in the statute, is not self-explanatory and could refer to a fee collected by an employer for distribution to staff, particularly where the fee is eighteen or nineteen percent. According to the Court, pursuant to the defendants’ interpretation, any fee so designated could never qualify as a service charge, even where patrons reasonably believed the fee to be one—a result contrary to the statute’s “patron-centric focus.”

This decision suggests that a business’s best chance to prevail in litigation over such fees is to both designate the charge as another type of fee and to include an explicit written disclaimer. If the fee is merely designated as an “administrative fee,” an issue of fact for the jury exists as to whether a patron would reasonably expect the fee to be distributed to employees. Employers should carefully review all written documents provided to customers with an eye toward minimizing the risk of litigation.

(If you are interested in this decision, please let us know and we will provide you with a copy.)