When is a “service charge” a tip?  And who gets it, the employer or the employee?  These aren’t just questions of etiquette, but are now serious issues for the restaurant and tourism sector in Hawaii.

We’ve blogged this issue twice before, on September 9, 2011, and November 1, 2011.  A number of resorts in Hawaii and elsewhere charge “service charges” or “service fees” for various restaurant and banquet services, often 20% of the food expenses.  In some cases, only a portion of that charge is paid to the service employees.

Hawaiian law regulates the treatment of service charges and tips through a number of interrelated statutes and regulations.  The key provision is a statute that states:

Hotel or restaurant service charge; disposition. Any hotel 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 or clearly disclose to the purchaser of the services that the service charge is being used to pay for costs or expenses other than wages and tips of employees.

 (HRS § 481B-14). 

At least two putative class action lawsuits were brought challenging the handling of services charges in federal district court, Villon v. Marriott Hotel Services, Inc., and Rodriguez & Basler v. Starwood Hotels & Resorts Worldwide, Inc., DBA Westin Maui Resort & Spa.  We described these cases more fully in our 2011 postings.

In 2011, two different federal district court judges handling these cases reached differing conclusions as to whether and when wait staff employees could assert claims for service charges not paid to them.  The confusion between the district court decisions arose in part because the courts were forced to construe several provisions together, among them a state department of labor regulation and this state statute, but the two were put into effect 20 years apart and did not use entirely comparable language.

The cases ended up before the Hawaiian Supreme Court on certified questions.  It announced its decision on July 16, 2013.  Villon v. Marriot Hotel Services, Inc., Case No. SCCQ-11-0000747 (S. Ct. Hawaii, July 16, 2013).

The Hawaiian Supreme Court noted the difficulties with construing the provisions, but ultimately held for the employees.  It found that:

When a hotel or restaurant applying a service charge for the sale of  food or beverage services allegedly violates HRS § 481B-14 by (1) not distributing the full service charge directly to its employees as “tip income” (in other words, as “wages and tips of employees”), and by (2) failing to disclose this practice to the purchaser of the services, the employees may bring an action . . . to enforce the employees’ rights and seek remedies.

The net result?  The two lawsuits will continue, but even in Hawaii employers can avoid liability either by paying service charge amounts over to employees or explaining, in a suitable manner of course, that all or a portion will not go to the service employees.

The Bottom Line:  The Hawaiian Supreme Court has now held that restaurant or banquet services charges are to be treated as tips earned by the wait staff unless the employer discloses otherwise.