Tip vs. Service Charge: The Implications for Service Industry Workers

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The basic premise of many labor laws comes down to an honest day’s wage for an honest day’s work. But employers may sometimes attempt to circumvent labor laws, paying employees less than federally-required minimums in order to increase their profit margin. One potential mechanism that employers may exploit to withhold compensation is by muddling the difference between a service charge and a tip.

Tips are specifically defined under U.S. tax and labor law. Per federal labor laws, restaurants and other service industry jobs are not required to pay their employees the full minimum wage, based on the premise that service industry employees will make up the difference in tips. Per the Internal Revenue Service, in order for monies to qualify as a tip, it must be optional for the customer, the amount must be determined by the customer, and the payment should not be determined by employer policy. Additionally, in most situations, a customer determines who precisely receives the tip.

Service charges appear quite similar at first glance. However, there are several critical differences. First, a service charge is a mandatory part of a payment. Additionally, the amount is predetermined by the employer in accordance with their policies, and the customer does not have any say in how the money is distributed.

To illustrate the difference, if you purchase a meal for yourself at most sit-down restaurants in the United States, you have the option of leaving a tip, for as much as you want, which will (usually) go directly to your server. However, if a large group of people goes to a restaurant, it’s pretty common for a 15-percent gratuity to automatically be included on the bill. If this amount is tallied along with the bill and goes to the restaurant instead of the specific server, it is more of a service charge. Keep in mind that many of the specifics may vary from one restaurant to another. Some may pool their tips and treat them more like a service charge, and in some cases the 15 percent gratuity for large groups may be paid out directly to the servers.

To a customer, the difference between a service charge and a tip is less obvious. However, for the server, the difference has substantial implications for their compensation and taxes. A tip is considered part of a server’s income, while a service charge goes towards the restaurant’s income. Ethically- and legally-questionable employers may try to exploit servers’ ignorance of these nuances to evade compensation and tax consequences for the income.

Lawsuits have been filed against various employers over alleged wage and hour violations. These wage and hour lawsuits vary considerably, but all hinge on the same central premise: that an employer has not compensated their employees in accordance with the law. These lawsuits seek the collection of these missing wages—sometimes with interest and reimbursement of legal costs.

Free Help for Wage & Hour Complaints

If you were paid with a mandatory service charge within the past four years and believe it may have negatively affected your minimum wage or overtime pay, you have rights under federal wage and hour laws. Obtain a free case evaluation by filling out the short form at the Service Charge, Wage & Hour Class Action Lawsuit Investigation. One of the skilled employment lawyers working with Top Class Actions may be able to help you get the money you’re owed, at no out-of-pocket cost to you.