In a 5-page summary order issued on March 5, 2020, the U.S. Court of Appeals for the Second Circuit held in Belizaire v. Ahold U.S.A., Inc., No. 19-457-cv, that the “delivery fee” paid by customers of Peapod LLC, a grocery delivery service, was not a charge purported to be a gratuity for an employee within the meaning of the New York Tip Law, codified as New York Labor Law (NYLL) § 196-d. The court reached its decision by applying the standards enunciated in the seminal Court of Appeals of the State of New York case, Samiento v. World Yacht Inc.

Samiento v. World Yacht, Inc.: Mandatory Service Charges vs. Voluntary Tips

In Samiento, the defendants owned and operated cruises in which the plaintiffs worked banquets as waitstaff. The plaintiffs claimed that the defendants violated NYLL § 196-d, which forbids an employer from retaining any part of a charge purported to be a gratuity meant for an employee. In support of their claims, the plaintiffs asserted that the defendants charged cruise patrons a mandatory 20 percent service charge that they purported to remit to the waitstaff as tips. The defendants argued that, unlike a mandatory service charge, gratuities under NYLL § 196-d must be voluntary.

In interpreting NYLL § 196-d, the Court of Appeals disagreed with the defendants, reasoning that the unambiguous language of the statute made clear that where a mandatory service charge has been represented to the consumer as compensation to waitstaff in lieu of the gratuity, such compensation is covered within the statutory language of NYLL § 196-d. New York’s high court further held that “[T]he standard under which a mandatory service charge is purported to be a gratuity should be weighed against the expectation of a reasonable consumer.”

Belizaire v. Ahold U.S.A., Inc.: “Service Fees and Tipping”

In Ahold, the plaintiffs were former delivery drivers for Ahold U.S.A.’s grocery delivery service, Peapod. Peapod delivery drivers typically picked up groceries from warerooms and delivered the groceries to customers. When customers placed orders for groceries through Peapod’s website, a virtual checkout cart informed the customer that a “delivery fee” was added to their bill. Neither the virtual checkout cart nor the resulting receipt contained a disclaimer that the service charge was not a gratuity. The Peapod website did not offer a place for customers to provide an additional tip, but included a section entitled “Service Fees and Tipping,” which provided that “[T]ipping is optional. It is not expected but always appreciated.” Peapod retained the entirety of the delivery fee, which decreased if a large order was placed.

In affirming the decision of the United States District Court for the Southern District of New York, the Second Circuit held the delivery fee did not constitute a gratuity under NYLL § 196-d. Specifically, the Second Circuit noted that the plaintiffs failed to allege that Peapod represented to customers that the delivery fee was a gratuity for their employees, and in fact Peapod’s website included a section titled “Service Fees and Tipping,” which distinguished the delivery fee from voluntary tips. The court also noted that the structure of the delivery fee itself, which decreased based on minimum order size, would lead a reasonable customer to believe it was not a gratuity.

The Second Circuit also distinguished Ahold from Samiento, noting that the plaintiffs in Samiento alleged that the defendants affirmatively misled customers by telling them that the mandatory service fee would be remitted to waitstaff, without actually doing so. The court further noted that the service fee in Samiento was alleged to be “roughly equivalent” to what waitstaff members would expect for gratuities, which was not true in Ahold. Instead, in Ahold, the plaintiffs recognized Peapod’s explanation on its website that “tipping is optional,” the court said.

Key Takeaway

While the Ahold decision is welcome news for employers engaged in the delivery service industry, companies that charge mandatory service fees in all industries may nonetheless want to consider including clear disclaimers that fees do not constitute gratuities. Such companies may also want to consider offering a clear means to provide gratuities should a customer choose to do so.