Service charge

Service charges or administrative charges? A distinction with a difference, according to the Supreme Judicial Court of Massachusetts | Jackson Lewis CP

Although it may have intended to treat the fee charged to the customer as an administrative overhead separate from tips paid to its employees, a country club’s reference to the amount as a “service charge” in some documents necessarily required that the amount withheld be paid to the employees, the Massachusetts Supreme Court recently ruled. Hovagimian v Concert Blue Hill, LLC, 2021 Mass. LEXIS 507 (Mass. August 23, 2021). The Supreme Judicial Court is Massachusetts’ highest court of appeals.


In Massachusetts, an employer who charges a tip or other gratuity is required to remit the full proceeds of that charge to wait staff and service employees on a prorated basis for the services provided. Mass. Gen. Laws Ann. c. 149, § 152A. Under this law, commonly referred to as the Tipping Act, the term “service charge” is defined as “a fee charged by an employer to a customer in lieu of a tip”. . ., including any charge designated as a service charge, tip, gratuity or fee that a customer or other consumer would reasonably expect to receive from a [tipped employee] instead of or in addition to a tip. All charges determined as “service charges” must be paid to the wait staff employee(s) providing the services, as such charges are those which a customer would reasonably assume to be proceeds paid to such employees for Services. they provided.

The trial

In this case, the defendant, operating as Blue Hill Country Club, hosts banquets and other events involving food and drink. When a client wishes to host such an event, they first sign an “event contract” with the club, setting out the general terms of the event, such as the deposit and payment schedule, menu options and the prices. The event contract also provides that the customer will be charged a 10% gratuity, to be paid to wait staff, and an additional 10% “administrative” or “overhead” charge which is retained by the club. Once the details are settled, the customer signs a “banquet event order invoice,” outlining things like expected number of guests, food and beverage selections, and other instructions for event managers. ‘event. After the event, the customer receives a final invoice with all actual charges listed. However, while the initial event contract listed the additional 10% club surcharge as an administrative or overhead charge, the banquet event order invoice and final billing documents did not clearly identify these charges, placing them rather in the category of “service charges and tips” or “service”.

In May 2018, banquet servers filed a complaint against the club, claiming that designating this 10% fee as a service charge required it to be paid to employees and that the club had unlawfully withheld it. Following counterclaims by the employer and plaintiffs, the magistrates’ court dismissed the case in favor of the club, on the grounds that the ‘safe harbour’ provision of the Tipping Act allowed the employer to retain the proceeds of the contested charge. The exemption provision of the tipping act allows an employer to “impose[e] on a customer a housekeeping or administrative charge in addition to or in lieu of the service charge or tip”, but only if the employer gives the customer a sufficient “designation or written description” of the charge. The plaintiffs appealed and the Court of Appeal upheld the dismissal on the same grounds.

On appeal, the Supreme Court Judicial found that the plain meaning of the tipping law required the club to hand over the disputed charge to the employees. Initially, the tribunal de grande instance considered the qualification of the charges in dispute. Citing longstanding principles of contract law, the court noted that any ambiguity in a contract must be construed against the drafter – here, the club. If the employer wished to retain the additional supplement as an administrative charge, then it was the employer’s responsibility to ensure that all contract documents accurately described the supplement accordingly. In this case, the club failed to do so in all of its documentation, instead classifying the fee as a service fee in certain documents provided to customers that, under Massachusetts law, must be given to servers.

Moreover, the club could not rely on the exemption clause of the Tip Act because its own description of the charges involved was as a “service charge”, at least in some documents provided to customers. The Court also found it particularly relevant that the charge was mislabeled on the final bill received just after the conclusion of the event, when a customer would be most likely to make a decision about tipping. Conversely, the event contract, which contained appropriate language sufficient to invoke the Tips Act safe harbor, had been signed months before the event and the client could not be expected to bases its decision to switch on a contract signed months earlier. Accordingly, the Supreme Judicial Court quashed and remanded the case, instructing to enter judgment in favor of the plaintiffs.

Takeaway meals

The Supreme Court Judicial decision confirms that it is best practice for restaurants, hotels and other employers in the hospitality industry to ensure that event contracts and all other related documents presented to customers accurately describe consistent, accurate and specific all administrative costs that the employer intends to both assess and withhold. Otherwise, these fees could ultimately be reclassified as a form of service or gratuity fees that must be paid to servers and other servers.