Seyfarth Shaw LLP | www.seyfarth.com Litigating CA Wage & Hour Class and PAGA Actions (23rd Edition) 57 E. Service Charges Prior to the 2019 California appelate decision in O’Grady v. Merchant Exchange Productions, Inc.,284 California appellate courts and the California Labor Commissioner had consistently held that service charges, as mandatory fees, were not gratuities, and that service charges were the employer’s property, which the employer could keep or distribute as it saw fit. The first key case, Searle v. Wyndham Internat., Inc.,285 involved an unfair competition claim brought by a hotel patron, alleging that the hotel’s practice of adding a 17% service charge to food bills without telling the public that it went to the servers was a deceptive practice. “Searle argues . . . Wyndham is acting unfairly in two respects: it is compelling payment of a gratuity which should otherwise be entirely voluntary, and secondly it is tricking consumers into paying servers more than they would otherwise provide by way of a tip. The difficulty we have with this argument is its premise: that because the 17 percent service charge is paid entirely to the server, we must therefore treat it as a gratuity. Neither logic nor the customs and usages associated with tipping support such a conclusion.” The appellate court further underscored the division between a service charge and a tip: Just as the hotel patron has no legitimate interest in what the hotel does with the large premium it earns from its mini-bar snacks, the patron has no legitimate interest in what the hotel does with the service charge. The hotel is free to retain for itself the large premium, as well as the service charge, or to remit all or some of the revenue to its employees. Because the service charge is mandatory and because the hotel is free to do with the charge it as it pleases, the service charge is simply not a gratuity which is subject to the discretion of the individual patron. The second case, Garcia v. Four Points Sheraton LAX,286 involved claims brought under the Los Angeles Hotel Ordinance, which required hotels in the LAX corridor to remit service charges in full to employees. Hotel employees brought several class actions against the defendant hotels, alleging the hotels were illegally retaining a portion of the service charge in violation of the ordinance. The hotel defendants demurred on the grounds that the local ordinance was preempted because Labor Code Section 351 occupied the field on service charges and tips, and the local ordinance interfered with the employer’s property right to the service charge. The appellate court rejected the argument that Section 351 occupied the field on service charges, primarily on the ground that service charges are not gratuities, and Labor Code Section 351 therefore did preempt the local ordinance, as Section 351 addresses tips/gratuities, not service charges: A gratuity is not a service charge. A service charge is a separately designated amount collected by a hotel from patrons that is part of the amount due the hotel for services rendered, rather than something “over and above the amount due.” (LAMC, § 184.01, subd. (F).) Thus, a service charge by definition is not a gratuity. The Legislature has made clear that amounts due for services (which include service charges) are not gratuities. This interpretation is confirmed by a recent amendment to the definition of gratuity carving out an exception for dancing services. (§ 350, subd. (e).) In addition to (and consistent with) the above appellate court authority, the California Labor Commissioner’s Office has listed service charges as distinct from tips, and as amounts that the employer may keep or distribute. https://www.dir.ca.gov/dlse/FAQ_TipsAndGratuities.htm (visited 1/5/22): Q: “Is a mandatory service charge considered to be the same as a tip or gratuity? A: No, a tip is a voluntary amount left by a patron for an employee. A mandatory service charge is an amount that a patron is required to pay based on a contractual agreement or a specified required service amount listed on the menu of an establishment. An example of a mandatory service charge that is a 284 O'Grady v. Merchant Exchange Productions, Inc., 41 Cal. App. 5th 771 (2019). 285 102 Cal.App.4th 1327 (2002). 286 188 Cal.App. 4th 364, 375 (2010)
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