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KM&M Client Prevails in Case with Important and Favorable Implications for Hospitality Industries

March 26, 2007

It is customary in the hospitality industry for banquet operators to assess a service charge” or a “service fee” of anywhere from 15% to 25% of the cost of food and beverage.  Usually, most of the fee is paid to the service staff in lieu of a gratuity, but part of the fee is paid to employees who are not customarily tipped (such as dishwashers, cooks, and others who participate “behind the scenes” in the presentation of the banquet), and part of the fee is not distributed to employees at all.  Recently, there have been several lawsuits in New York in which waiters and bartenders claimed entitlement to the entirety of such service charges.  These suits assert that such charges are really “gratuities” within the meaning of New York Labor Law § 196-d, which provides, “No employer . . . shall . . . retain any part of a gratuity or of any charge purported to be a gratuity for an employee.”     

In Samiento v. World Yacht Inc., __ A.D.3d ___ (1st Dept. 2007), reported at 2007 WL 764524 (March 15, 2007), a case in which KM&M represented the employer, the Appellate Division of the Supreme Court of the State of New York, First Department, issued a decision that is important for the hospitality industry, because the court laid it down as a black letter rule that such service charges are not “gratuities” within the meaning of § 196-d.  The court ruled that amounts collected by a restaurant are “gratuities” that the employer is obligated by law to pay to employees in their entirety only if the decision whether to leave the amount and, if so, in what amount, is voluntary with the patron.  If the charge is mandatory -- that is, a charge that is imposed on the patron or contractually negotiated in advance of the rendering of the service -- it is not a gratuity, and may be distributed to service staff or other employees only if and to the extent that the employer chooses.

The breadth of the Samiento holding is illustrated by the fact that the court decided the gratuity/service charge issue not only in regard to banquet service charges, but also in the context of service charges that the employer, which operates dining cruises in New York harbor, automatically adds to the ticket price for dinner cruises on special events, such as New Year’s Eve and July 4th cruises.  The case raised the additional issue of whether the employer was obligated to pay a “customary gratuity” to its table service staff where it told patrons on its general public cruises that the cost of their ticket included gratuities.  The court held that in both of these contexts, the amounts at issue were “mandatory service charge[s] that [were] not in the nature of [] voluntary gratuit[ies].”

In so holding, the court rejected two theories that have been appearing in other New York cases involving gratuities.  The Samiento plaintiffs claimed that the “service charges” at issue should be treated as “gratuities” because the banquet patrons were told that those charge were a gratuity and also because the employer supposedly treated those charges on its tax returns as tips (on which sales tax is not owed) rather than as service charges (on which sales tax is owed).  The court stated that the charges were not “gratuities” within the meaning of § 196-d because they were mandatory fees, and therefore were “not in the nature of a voluntary gratuity,” “notwithstanding defendants’ treatment of the charge for sales or income tax purposes, and the fact that certain patrons believed the charge to be in the nature of a gratuity.”   (Emphasis added.)

The Samiento decision suggests that employers in the food service industry may employ such practices as the “service compris” approach common in Europe (by which the price of the meal includes service and tips are discouraged and not expected), or the addition of a mandatory “service charge” to the price of banquets, large groups, or even other diners (as long as the patron is advised of the amount and mandatory nature of the charge in advance of ordering the meal) and compensate the service staff in the way that the employer deems most fair, without fear of litigation over the lawfulness of its distribution of service charges.