What Constitutes a Service Charge?
A service charge is an amount of money requested from patrons in addition to the menu prices for the goods or services received. The American Heritage Dictionary defines a service charge as "a fee for services rendered," and lists "bank fees" and "late fees" in its example. You are familiar with these sorts of fees, which come up often when one does business with a third party. Service charges are not gratuities, which are directly from the customer to the server. Calculating how much a person should leave as a tip (and for which services) is usually a matter of cultural norm, custom, and individual preference. One is more or less socially required to leave a tip, but one is much less obligated to leave a service charge, should one appear, as a line item in a bill . As we will discuss later in this post, service charges may be discretionary or mandatory, depending on applicable law, regulation, or custom. Examples of service charges include: "convience fees" associated with certain payment methods, such as credit cards or electronic check; fees assessed for additional people at certain accommodations, such as "extra person" fees at hotels; certain upcharges for group dining or banqueting, such as "restaurant fees & gratuity" associated with banquet menus. And different from a "safety-net" fee is the sometimes-excessive "resort fee" that is charged, for example, by certain hotels for the mere privilege of being present in the hotel, whether one has used the amenities such as a pool or not.
The Statute Related to Service Charge
The legal framework governing service charges is established at both the state and federal levels, with variations in implementation and application across different jurisdictions. In addition to federal and state regulations, some service charge requirements are imposed by district of Columbia agencies, requiring businesses in the District of Columbia to establish their compliance procedures in accordance with the relevant law or regulations.
On the federal level, the Truth in Led Directorate (Section 162) of the Print Image Department (PID) Act of 1967 mandates that all service charges for merchandise not exceed 20% of the total charge amount. The Directorate also dictates that any service charge retained by the merchant must be distributed in accordance with the merchant’s internal policies and, in the absence of set rules, only in accordance with the law.
The District of Columbia imposes a number of laws and regulations pertaining to service charges, including the Service Charge Act of 1975 (D.C. Law 1-91), the Nest Room Directives (D.C. Law 1-91), and the Hotel Service Charges Act of 1998 (D.C. Law 12-127).
Under the Service Charge Act of 1975, any establishment that includes a service charge in the total bill amount or prices advertised for goods, services, food or beverages shall, upon request, disclose the amount charged in accordance with Section 1(b) of the Service Charge Act. In requirements applicable to all establishments that charge service charges in the District of Columbia, establishment employees do not receive the entire service charge. The amount of the service charge allocated to the employee for services rendered shall be disclosed to the customer upon request. The amount retained by the establishment shall be disclosed in writing, upon request, if not included in the establishment’s written policies. The law further requires that any establishment that uses service charges "impose the same service charges upon all customers for similar goods, services, food, and/or beverages provided." There is an exception for establishments that provide entertainment to customers or where "service charges are related to banquets, parties, or similar events."
Similar requirements for the disclosure of service charge amounts apply to the Nest Room Directives, which govern room rate services such as mini bars or vending machines. Under these Regulations, there exists a "legitimate expectation" that advertised prices include all services and price information. The Action requires that all fees for room rate services be disclosed to the consumer before the consumer is charged.
Further, the Hotel Service Charges Act of 1998 requires a hotel in the District of Columbia to establish a written policy with respect to the collection, retention and distribution of room service charges, banquet service charges, and other orderly service charges. The written policy must be disclosed, upon request of a consumer, in compliance of Section 211(2)(d) of [D.C. Official Code]. The law also requires the establishment of a governing system for the establishment and revision of the policy. Once established, the hotel must make payment for any service charge in accordance with the "orderly service charge policy" and in compliance with any set procedures.
Service Charges Within Certain Industries
Service charges are commonly utilized in the hospitality industry. For example, hotels and resorts often include a service charge on their invoices. Some legal issues related to this practice are discussed in our previous blog "Service Charges: Is it a Tip or Service Charge?". As a general rule of thumb, although service charges are not tips, for under the tip credit regulations of the Fair Labor Standards Act, employers must treat service charges the same as they treat tips. Thus if an employer takes a tip credit against minimum wage for the tipped employees, it must include the service charges as income to the employees in meeting the 50% of minimum wage requirement for applicability of the tip credit.
Restaurants and other food service operations engage in different practices with respect to service charges. Some use service charges on special events and parties. Others charge more for dinner parties that require separate dining rooms. Still others add a service charge for large parties of 6 or more people. Some employers do not charge service charges at all and abide by the default rule under most state and local laws that tips are discretionary. Some restaurant employers give the service charges that they impose to the employees as direct gratuities. Some also share the tip proceeds with other non-tipped employees, such as those in the kitchen. Critics contend that these actions violate the tip credit regulations for the Fair Labor Standards Act, although the courts have had a mixed response to those criticisms. To avoid such challenges, some restaurant employers disclose their policy in service agreements with patrons or in menu notices.
In contrast to the restaurant and hospitality industries, some service charge systems in the real estate and financial services industries have significant legal distinctions. For example, some courts have held that condominium communities’ administrative fees are not subject to the Federal Trade Commission’s rules of conduct regarding deceptive acts and practices.
Service Charges, Consumers and Disputes
Consumers have rights when it comes to service charges on top of the rights detailed in your lease. If you feel that you have been unfairly charged for your service charge, there are several steps you can take to bring the dispute to a swift end. Even if you haven’t lived in your home for a full year, you are entitled to receive a summary of relevant accounts. This should detail not just what you have already paid, but the full breakdown of charges for the buildings, grounds, estates or any other area covered by your service charges. You should also get contact details for your property manager, so you can easily obtain specific details if you want to know exactly what something is for. The summary of relevant accounts from your service charge should be available for free, and should be delivered no later than six months after the end of the accounting period it covers. You should also receive quarterly invoices detailing service charge estimates when appropriate, so you can see when extra payments need to be made. This quarterly allowance is only for property where you don’t pay a standard fixed amount, rather than the actual costs. However the real test of whether the charges you pay are fair comes should come from audits. They should be carried out at least once a year, and should be presented to you in a timely manner so there is no chance of a large payment coming as a surprise. As there is no fixed timetable for when this should be provided , you are likely to have to make requests for them to be carried out if they haven’t been offered to you. If you do have to dispute something to do with the bill, you should put the dispute down in writing using recorded delivery as a precaution. If you are charged more than you should be, the "compose and send" method of handling a service charge dispute will allow you to get your money back. If you pay extra you can get a refund, and you are also entitled to be compensated for any problems caused if the dispute leads to a delay in rectifying whatever problems there may have been. Having said that, such a strategy isn’t for everyone. Many people argue that as the bills don’t belong to them it’s not their place to dispute them. However this is again an argument that doesn’t really stand up in practical terms. Take a leaseholder and a freeholder who agree to a set cost. If the freeholder then tries to turn that cost into a billable one, they shouldn’t be allowed to. When you’re reading through the service charge bill and audit, there may seem to be some things you’d like to dispute. It’s worth doing so as long as there is a legitimate reason for doing so. Resolve disputes as quickly as possible, and you’ll find the issue is solved sooner than you may have first thought.
The Ramifications of Service Charges for Worker and Management
Service charges can have significant implications for both employees and employers. For employees, they can drive a significant portion of their compensation either as a bonus to an already high base salary or as the primary means by which lower-paid workers provide for their families. Mistakenly taken away from servers in violation of the law, they can be devastating. From the employers’ perspective, those variations in the amounts of service charges can create significant cash flow and invoice processing problems if there are no controls or systems in place to address them.
Assuming a service charge is legal, it is going to impact the portion of an employee’s income that is attributable to wages, tips, or commissions. For example, in two recent cases, plaintiffs alleged that Starbucks’ payment practices violated California’s tip statute because it, among other things, required employees to share the service charge with shift supervisors, shift leaders, and shift managers. In both cases, the service charge was imposed on customers’ checks, the amount of which varied based on whether the customer signed up for the "Starbucks Card™" and, thus, paid a lower bill . While the plaintiffs lost both cases, the case law underscores that in order to avoid liability for violation of the law, the service charge must be paid to the employees and distributed correctly.
Many restaurants tack on service or "house" or "team" charges when the customer places a large order that requires a lot of delivery time, when there is a very large party, or when a reservation is made for a large party. This provides a means though which the customer acknowledges that his/her bill has been increased and provides the server a larger tip. Sometimes, however, these service charges become opportunities to reduce the base pay of the worker(s) whose shifts generated the service charges.
Service charges can, and often do, create tension between wait staff and the management if they are not distributed properly. Many establishments levy a service charge on all invoices and then distribute a portion of it on a monthly basis to the staff in the form of a lump sum that does not change depending on the amount of service charges passed on in the month. Others add additional charges to certain invoices on a case-by-case basis but guarantee a tip of a certain percentage. Depending on whether an employer finds ways to work with its staff, even somewhat innocuous service charges can create ongoing conflict.