Steps for Employers to Follow to Ensure “Service Charge” Compliance With Regards to Special and Corporate Events

July 28, 2021

Photo courtesy of Venue Report

Navigating the administrative fee v. gratuity situation has been very confusing for business owners who execute a banquet or private event for customers, and has been compounded by legal developments in recent years. 

Legal Background 

New York Labor Law (NYLL) § 196-d prohibits employers from “retain[ing] any part of a gratuity or of any charge purported to be a gratuity for an employee.” This law is the product of the 2008 New York Court of Appeals critical decision in Samiento v. World Yacht, Inc., 10 N.Y.3d 70 (2008). The lawsuit concluded that a charge, such as a private event administrative fee) that is not a voluntary payment may nonetheless be a “charge purported to be a gratuity” unless certain requirements are met. The Court decided that, essentially, if a person could not understand whether the service charge was a gratuity or not, it would be treated as a gratuity. As such, the gratuity would need to be distributed amongst the employees who worked said event. 

In 2011, the New York State Department of Labor (NYDOL) codified the decision from Samiento v. World Yacht, Inc with increased requirements and guidance. The regulations are as follows:

  • Charges purported to be gratuities must be distributed to the employees who worked said event as gratuities. 
  • Under a rebuttable presumption was added, charges purported to be a gratuity include: “any charge in addition to charges for food, beverage, lodging and other specified materials or services, including but not limited to any charge for ‘service’ or ‘food service’”
  • Administrative charges include charges for “the administration of a banquet, special function, or package deal.” 
    • These charges must be identified as administrative charges and not a gratuity or tip, and the customer(s) must be “adequately notified” of such. 
    • Said “adequate notification” must be provided by the employee and must include: 
  • a statement in the contract or agreement with the customer, and on any menu and bill listing prices, that the administrative charge is for administration of the banquet, special function, or package deal, is not purported to be a gratuity, and will not be distributed as gratuities to the employees who provided service to the guests.”

Law

It is legal to institute a mandatory charge for a private event. However, the employer must ensure that both its employees and the customer(s) paying for the event understand that such a charge is a fee and not a voluntary gratuity to be distributed to those working the event. If an employer fails to make that clear, then a class action lawsuit can be filed by employees who will contend that the charge purported to be a gratuity. There is a six-year statute of limitation in New York.  

What Should Employers Do, and Remember, Now:

  1. If employers want to retain the entirety, or a portion, of the administrative fee, they must follow these steps stipulated by New York State’s labor laws:
  2. The customer and the employees must be made aware of the administrative fee. 
  1. Attached to the contract(s) associated with the event – as well as any other documentation discussing the financials of the event, including emails, receipts, invoices and credit card slips – must be a clear and explicit disclaimer for the customer created by the employer.
  2. This disclaimer must state that the administrative fee is not a gratuity and will not be distributed to those employees working the event as such. 
  3. As stipulated by the New York State Department of Labor, this disclaimer must “use ordinary language readily understood and shall appear in a font size similar to surrounding text, but no smaller than a 12-point font.”
  4. Employers must inform the employees who will work said event of 3 crucial pieces of information: how they will be compensated, whether a service charge will be paid to them, and whether gratuities are available.  

.Employers must also provide employees with an updated New York State Rate of Pay form (NYDOL form LS54 or LS55) in some instances.

  1. If employers want to give the customer(s) a choice, they can separate a mandatory administrative fee as a line-item amount as well as a separate gratuity line. 

.                     The gratuity line must make clear that the gratuity is discretionary to the customer. 

a.                   Generally, employers must give the customer(s) the choice of selecting the amount of the gratuity.

.One such choice can, indeed, be nothing.  

b.                   Attached to the contract(s) associated with the event – as well as any other documentation discussing the financials of the event, including emails, receipts, invoices and credit card slips – must be a clear and explicit disclaimer for the customer created by the employer.

.This disclaimer must state exactly what the fees are and that neither is a gratuity. 

  1. What about a tip credit? 

.                     If all requirements to take a tip credit are met, then a tip credit can be taken as long as there is a gratuity line that the customer was given the opportunity to insert, revise, and/or change

a.                   If the gratuity is a “mandatory gratuity” or some automatic charge that could be construed as a gratuity, then a New York employer cannot take the tip credit 

.This holds even if all of the monies from that line item go to the service employees and all of the other requirements necessary to take a tip credit are met. 

b.                   If all requirements to take a tip credit are met, the employer creates a separate gratuity line, and the customer can select the amount of gratuity, then a tip credit can be taken. 

c.                   If there is a mandatory service charge, and the customer is not given the opportunity to provide input, then a tip credit can not be taken. 

.This holds even if the monies go to the service employees. 

  1. It is strongly recommended that employers consult with an experienced labor and employment attorney to ensure that their documentation is in order. 

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