Service Charge Paid to California Banquet Hall May Be a Gratuity Owed to Workers


By Joanne Deschenaux July 18, 2019
Service Charge Paid to California Banquet Hall May Be a Gratuity Owed to Workers

A 21 percent service charge added by a banquet hall operator to the facility's food and beverage bills may be a gratuity, which California law requires to go to nonmanagerial employees who serve food and beverages, a California appellate court ruled.

The trial court incorrectly dismissed the case after ruling that a mandatory service charge can never be a gratuity, the appeals court said. The appeals court sent the case back to the lower court to review whether the hall operator could legally keep part of the fees.

The plaintiff is a banquet server and bartender at a ballroom in San Francisco. She filed a class-action lawsuit claiming that her employer violated California law by keeping part of the service charge it added to food and beverage bills.

The plaintiff claimed that the service charge was a "gratuity" and, therefore, California law required the banquet hall operator to distribute the entire amount to nonmanagerial banquet service workers.


The California labor code defines "gratuity" as any "tip, gratuity or money" that "has been paid or given to or left for an employee by a patron of a business over and above the actual amount due the business for services rendered or for goods, food, drink, or articles sold or served to the patron."

The law says an employer cannot take any gratuity that a patron pays an employee. Rather, the law says that every gratuity is "declared to be the sole property of the employee or employees to whom it was paid, given or left for."

The statute adds that an employer that allows patrons to use credit cards to pay gratuities must pay the employees the full gratuity that the patron put on the credit card slip, without deducting processing fees that the credit card company may charge the employer.

[SHRM members-only toolkit: Complying with California Wage Payment and Hours of Work Laws]

The court noted that although the terms "tip," "gratuity" and "service charge" are commonly used as if they are interchangeable, "service charge" actually has no fixed meaning. Rather, the court said, it only assumes meaning from the surrounding context.

For example, in the context of retail installment contracts, "service charge" usually means interest on an unpaid installment or a late fee. In the context of public utilities, a service charge is a fee charged for starting, maintaining or discontinuing gas, electricity or water.

"In short," the court said, "simply calling something a 'service charge' hardly ever explains what it is or why it is being imposed."

The court then considered what the term means in the food and beverage industry. The trial court had relied on two previous cases when deciding that a "service charge" can never be a gratuity under the state's labor code. Although those two cases did arise within the food and beverage industry, the appeals court reasoned, both employers in those instances imposed a service charge but also told customers that they could leave a "tip or gratuity" for their servers. In both cases, therefore, the employers distinguished between the service charge and the gratuity the customer could choose to add, the court said. The hall owner in this case merely imposed the service charge and did not mention that customers could also tip servers.

The two prior cases don't categorically establish that a service charge—even a mandatory one—can never qualify as a gratuity, the appeals court concluded.

Furthermore, the court said, the plaintiff suggests that it is a custom in the hospitality industry to treat sums designated as service charges as gratuities for employees. The plaintiff should be allowed to prove that this is the case, the appeals court said in returning the case to the lower court.

O'Grady v. Merchant Exchange Productions Inc., Calif. Ct. App., No. A148513 (June 27, 2019).

Professional Pointer: The court in this case did not rule that the mandatory service charges collected were entirely gratuities. It said only that the trial court was wrong in deciding that they definitely were not and that the plaintiff was entitled to try to prove her claim that the servers were entitled to all of the sums collected.

Joanne Deschenaux, J.D., is a freelance writer in Annapolis, Md. 


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