In the latest decision concerning service charges and tips in the hospitality industry, the Maine Supreme Court recently addressed whether banquet wait staff may share a “service charge” paid by customers with other employees under Maine law without violating Maine’s tip credit statute. In Hayden-Tidd v. The Cliff House & Motels, Inc., the plaintiff, a former banquet server, appealed summary judgment dismissing her putative class action, which alleged that the employer violated Maine law by not paying her and her fellow servers the entire mandatory “service charge” assessed to customers when the employer instead shared the service charge among other banquet employees. The Maine Supreme Court held that the employer’s practice did not violate Maine law.

Specifically, Maine law in effect during the plaintiff’s employment provided that an employer could pay only half of the minimum wage to its employees who received tips sufficient to raise their wages at or above the statutory minimum ($7.50 per hour during the relevant period). In order to ensure that employees received the entire tip left by the customer, the tip credit statute further required that “[t]ips that [were] automatically included in the customer’s bill or that [were] charged to a credit card must be given to the service employee.”  

The employer in this case charged a mandatory 19% “service charge” for all banquet events, along with a separate line-item for a “gratuity” on customers’ bills, but a gratuity was rarely added by banquet customers. Although customers did not receive any explanation of the service charge or how it is distributed, the employer pooled the service charges collected each week and distributed 13% to banquet servers and the remaining 6% to non-server banquet staff. The employer did not retain any portion of the service charge.

Under this arrangement, the employer paid the plaintiff and her counterparts $3.75 per hour base wages, plus the 13% tip credit – resulting in average per hour wages of $23.92 to $35.09. While this was well above the minimum wage, the plaintiff argued that, based on the tip credit statute’s language requiring that tips that are automatically included in a customer’s bill be given to the employee, the employer’s practice of allocating a portion of the service charge to banquet staff other than the servers violated the statute. The plaintiff claimed that, as a result, the employer was not entitled to a tip credit against the minimum wage for the amounts of the service charge provided to banquet servers, and that she and her fellow servers were therefore not paid the full minimum wage and entitled to an additional $3.75 per hour in compensation.

The court examined whether the service charge should be treated as a tip automatically included in customers’ bills (and therefore required to be wholly provided to the banquet servers), or as an aggregate charge, only a portion of which should be treated as a tip. Noting that “tip” was undefined in the statute, the court held that nothing in the statute required the employer to treat the entire service charge as a “tip.” The court further observed that several facts militated against finding that the entire charge was a tip, including that the “service charge was not called a ‘tip’ in the contract with the customer; and the service charge was not individually paid to the banquet servers by the persons served.” Accordingly, the court found that the employer was “engaged in a practice that was distinct from the practice of calculating a total gratuity on a bill given to customers at the time of service,” which, according to the court, was the practice the statute was intended to address. As such, the court held that the employer’s practice was lawful and affirmed summary judgment.

It also bears noting that, after the plaintiff initiated her lawsuit, but before the lower court’s ruling, the tip credit statute was amended to specifically permit the employer’s service charge arrangement. The law, as amended, now states that an “employer in a banquet or private club setting may use some or all of any service charge to meet its obligation to compensate all employees at the rate required by this section.” Because the Maine Legislature did not state that the amendment was retroactive, however, it had no bearing on the court’s decision in Hayden-Tidd.