How restaurant service charges differ from tips
A tip belongs to the employee. A service charge belongs to the business unless it is distributed. The difference changes wages, taxes and what must be disclosed.
The line at the bottom of a restaurant bill has become genuinely confusing, and the confusion is not accidental. Tips and service charges are different things with different legal consequences.
Gratuities
A tip is a voluntary payment from a customer to an employee. It is the employee's property. An employer may not take any part of it, and may not credit it against the wages it owes.
California does not permit a tip credit. The full minimum wage is payable regardless of tips received, which is a substantial difference from most states and a large part of why menu prices here look as they do.
Service charges
A mandatory charge added to a bill — a large-party charge, a kitchen appreciation fee, a banquet service charge — is not a gratuity, because the customer did not choose to pay it.
It is revenue of the business. The business may keep it, may distribute all or part of it to staff, and may distribute it to categories of staff who could not lawfully participate in a tip pool.
Where it is distributed to employees, it is generally treated as wages, which means it counts toward the regular rate for overtime calculation. That is an obligation employers periodically get wrong.
“Customers reasonably assume a service charge reaches the server. Often part of it does, and there is no general rule that it must.”
Disclosure
Mandatory charges must be disclosed clearly, and the framework governing hidden mandatory fees in advertised prices has been tightened, with specific treatment for restaurants. The direction of travel is toward the total being visible before you order.
A charge described in a way that implies it is a gratuity, while being retained by the business, raises a different and more serious problem than one described accurately.
Credit card processing
An employer may not deduct credit card processing costs from an employee's tip. The tipped amount must be paid in full, and by the next regular payday.
Practical points
- Read the fine print at the bottom of the menu, where the charge is defined.
- If you want a specific server paid, cash is unambiguous.
- For employers: document how service charges are allocated, and include distributed amounts in the regular rate.
- For employees: a supervisor in a tip pool is a specific and checkable problem.
