Country clubs and other private clubs have traditionally utilized service charges on food and beverage sales to supplement their revenue. In most cases, this supplemental revenue is used to pay higher wages to all employees at a club. This system was developed to allow clubs to retain valuable employees in the face of seasonal variations in the flow of business. Recently, this system has come under fire by plaintiffs' attorneys looking to take advantage of the language of state statutes to classify these service charges as "tips or gratuities" and to demand that all service charges be disgorged by clubs and paid to classes of past and present employees. They make these claims in spite of the fact that much of the money collected as service charges is, in fact, paid to employees as hourly wages. The cases are brought as class actions seeking to represent all employees of such clubs for periods dating back several years from the filing of complaints. As a result, these cases can cover hundreds of employees and involve large damages claims.
The fundamental issue in these cases is whether the service charges are, in fact, gratuities that are the property of employees who provided service to customers. Some states have expressly addressed service charges in their laws regarding tips and gratuities.
Minnesota law defines "gratuities" as monetary contributions received directly or indirectly by an employee from a guest, patron, or customer for services rendered and includes an obligatory charge assessed to customers, guests or patrons which might reasonably be construed by the guest, customer, or patron as being a payment for personal services rendered by an employee and for which no clear and conspicuous notice is given by the employer to the customer, guest, or patron that the charge is not the property of the employee.
Minn. Stat. § 177.23, Subd. 9.
New York law provides that:
"[n]o employer or his agent or an officer or agent of any corporation, or any other person shall demand or accept, directly or indirectly, any part of the gratuities, received by an employee, or retain any part of a gratuity or of any charge purported to be a gratuity for an employee."
N.Y. Lab. Law § 196 d. Courts in New York have held that whether a mandatory service charge is a gratuity covered by this law is dependent on whether customers reasonably believed the charges were in fact gratuities for employees. Some factors considered by the New York courts have included whether a customer was explicitly informed that a service charge was NOT a gratuity and whether the terminology for a service charge was consistent throughout a customer's experience. Spicer v. Pier Sixty LLC, 269 F.R.D. 321 (S.D.N.Y. 2010).
Massachusetts law specifically addresses and defines a "service charge" as:
"a fee charged by an employer to a patron in lieu of a tip to any wait staff employee, service employee or service bartender, including any fee designated as a service charge, tip gratuity, or a fee that a patron or other consumer would reasonably expect to be given to a wait staff employee, service employee, or service bartender in lieu of, or in addition to, a tip."
Mass. Gen. Laws Ann. § 152A.
Hawaii's statute plainly states within its statutory text that "[a]ny [h]otel or restaurant that applies a service charge for the sale of food or beverage services . . . shall distribute the service charge directly to its employees as tip income." Haw. Rev. Stat. Ann. § 481B-14.
The issue identified in each state in which this issue has been raised (other than Hawaii) is what the customer reasonably believed the service charge to be. If, under the circumstances, a service charge could reasonably be interpreted to be charged in lieu of leaving a tip, it is likely that a court would find that service charge to be subject to the requirements imposed on any tip or gratuity.
The impact of such a ruling could be devastating to a club. If it is determined that service charges were improperly controlled by an employer club for an entire class of past and present employees, the club could be required to disgorge ALL service charges collected over the period allowed by statute and pay them to the employee class. In addition, most states would subject such an employer to a penalty for withholding wages that would more than double the amount to be paid to the employee class.
One of the biggest surprises to private clubs facing such claims is that these claims are virtually uninsurable. Claims for payment of wages are almost always excluded from insurance coverage. At best, clubs will be able to insure against the costs of defending claims of this nature. However, many clubs faced with these types of claims are forced to cover the costs of defending the claims and any potential damages on their own.
Stinson Leonard Street attorneys routinely help employers in this industry take the following steps to avoid or minimize this risk:
- Audit existing service charges and accounting practices to determine club’s practices involving the collection and treatment of service charges
- Review internal documents and communications for references to service charge policies to avoid comments that could be misconstrued to characterize service charges as tips
- Review compensation structure for club employees and payment of service charge revenue and any gratuities or tips for purposes of bringing them in compliance with applicable law
- Ensure appropriate training of management and staff regarding service charge policies and procedures