A Guide to Florida Service Charge Laws
The Florida Service Charge Laws exist to clarify and establish an understanding between consumers and those who provide them goods or services. In essence, the laws serve to regulate and prevent false advertising expectations from business establishments that charge and collect a "service charge." Florida’s service charge laws most clearly apply to the hospitality industry that use service charges, sometimes referred to as a "tip," to compensate their servers. The most prevalent type of business in Florida that usually applies the service charges is the restaurant. This is why much of the case law on service charges arises from the restaurant industry.
In this segment, we will touch on the purpose and importance of the service charge laws, the legislative history, its application and how it applies specifically to the restaurant industry .
For centuries, courts have struggled with whether a service charge constitutes a tip or a gratuity; however, the answer to this question generally depended upon whether business establishments were serving patrons of their respective establishments (e.g., a restaurant). The vast majority of State and Federal Courts have also held that gratuities and tips are merely voluntary without any legal obligation or duty of an employer to pay server’s gratuities or tips. Only the customer (patron) may determine the amount, if any, for the consideration given in return for services performed. Therefore, unless the restaurant or bar offers any proof or evidence to the contrary, the employer’s policy or practice to keep the service charge constitutes a violation of Section 509.013(2)(b)1-4, Florida Statutes, which is entitled to treble damages, costs and attorneys fees.
What Service Charges Are Under the Law
A service charge is a sum to be paid for a service. Restaurant patrons are familiar with the term "gratuity" as it refers to the voluntary amount added to the bill for the performance of service. In accordance with federal law, "gratuity" is not included in the minimum wage. Therefore, gratuities must be counted separately from any charge designated by the employer as a service charge. For example, an employer who adds a mandatory service charge of $1.00 per meal to all meal checks, in addition to the employees’ regular hourly rate of pay ($8.00 per hour), is not required to count the mandatory service charge of $1.00 per meal towards the employer’s minimum wage obligation. The employer’s "tip credit" under S 3(m) of the Fair Labor Standards Act does not apply.
Both the Florida Constitution and the Florida Franchise Practices Act define a service charge as "a per transaction charge, however described, that is paid directly to the entity providing the service." A service charge does not include the following: (a) amounts for which the entity providing the service is required to transmit in full to an employee providing the service, whether for tax withholding purposes or otherwise; (b) amounts withheld by the entity providing the service to defray directly the costs of providing the service; (c) amounts deducted by the entity providing the service as a result of chargebacks, reversals, or other fees or costs that the entity incurs, or is obligated to pay, in connection with the payment accepted by the entity; or (d) amounts paid by the customer at the time of payment by the customer and at the point of sale (often referred to as an "on-card tip" or "on-check tip").
Overview of the Present Service Charge Laws
Currently, though, some of the confusion has been removed by a July 24, 2007 opinion letter issued by the Florida Division of Hotels and Restaurants.
In that letter, the Division notes that Gratuities and other service charges added to bills for banquets, buffets, buffets, and functions at which food is served by a server are service charges, rather than gratuities. The Division further states that such service charges are not gratuities and should not appear on the disk of gratuities and tip reporting.
The Division also states that the fact that a mandatory 18% or 15% service charge is added to a banquet or buffet check (as opposed to being left up to the discretion of the customer) does not change the outcome. According to the Division, such a mandatory service charge is still a service charge imposed on the customer, rather than a gratuity paid by the customer.
Implications of Service Charges for Employees
Florida’s service charge laws significantly impact the hospitality and restaurant industry. These businesses often utilize a mandatory service charge as part of their compensation scheme for servers and other tipped employees. A service charge is generally added to each check for all diners—rather than being left to the customer’s discretion—and is generally split among all servers or distributed according to predetermined amounts.
Both the Florida Wage Act and related U.S. Department of Labor regulations permit employers to take a tip credit only for gratuities that are "received by an individual as a gift" from a customer and solely for the individual’s "own use and benefit." Courts have generally interpreted this definition to exclude those tips that the employer controls, receives and, often, possesses full ownership of—such as a mandatory service charge.
Florida courts have emphasized that the amount of tips retained by a server is not dispositive. This means that even if an employee retains some or all of the charge as additional compensation for his or her services, it could still be unlawful. In fact, courts examining this issue in other states have rejected arguments that a mandatory charge is a tip when the charge is controlled by and distributed by the employer, even when employees get to keep a portion of the charge.
An employer’s use of a mandatory service charge further creates issues in the calculation of the employee’s minimum wage, overtime pay, and tip credit.
The issue is best illustrated by an example. Suppose a restaurant adds a 15% mandatory gratuity/service charge (let’s call it "S") to the tabs of all its tables. If no one tipped above the S amount, the employer would be fully permitted under the law to take a tip credit (referred to here as "T") against the minimum wage (referred to here as "W"). This means the employer could deduct T from W to determine how much minimum wage is required. But suppose then that one table (or two or even three) left a "tip" in excess of S. The employer could not consider these tips to be additional, completely separate tips (T) from S. Under the law, the employer receives S for its own accounts and thus, needs to pay its employees W plus all of S plus T that was retained by the employee as back wages to the employee.
Florida courts have not had many opportunities to weigh in on the service charge issue, but the few cases that have considered this issue were all brought on behalf of servers subject to the mandatory service charge policy. These cases collectively suggest that a mandatory service charge also fails as a tip when the employer asserts substantial control over the charge, including where the employer redistributes the proceeds among all the employees subject to sharing the charge—even as among employees in positions that do not customarily receive tips.
In order for Florida hospitality establishments to have a consistent framework in which to develop their tipping, service charge, and minimum wage policies without risking exposure, this area of the law must be clarified. Until that happens, Florida restaurant and hospitality employers should consider rethinking whether to continue using mandatory service charges in their establishments.
Requirements and Compliance for Businesses
While it is clear that, in most circumstances, a few words on a menu or an entry in a register may not be enough to create a Service Charge, other disclosures may be necessary depending on the context, location, and/or nature of the charge. For example:
Service charges are subject to very high employer liability to third-parties-including the IRS, state and local tax authorities, injured service employees, and former service employees. Thus, any attempted use of Service Charges requires careful and well thought out planning in order to comply with dozens of federal and state laws. The following are some key tips to keep in mind from the perspective of both employers and employees.
Employers, including employers who have opted to exclude tips from their gross receipts, must first determine how they wish to manage tips and service charges. Then, in the case of service charges , the best practices are for the employer to consistently:
Whether the worker receives the Service Charges: If 100% of the Service Charges are distributed to the service workers, the employer should make this clear on the bill, and the employer must retain an explanation for the distribution for at least 3 years (i.e., a report or graph showing compliance with its municipal ordinance, with a description of how tips were calculated).
Whether the worker receives part of the Service Charges: If the worker receives part of the Service Charges, the employer should provide a separate disclosure to the worker with an explanation of what Service Charges will go to the worker and how they are calculated.
Whether the worker receives no part of the Service Charges: If the worker receives no part of the Service Charges, then the employer should make it clear on the bill or check that the item is a Service Charge and the employer should retain for 3 years paper or electronic records reflecting the service worker compensation plan.
Consumer Rights and Service Charge Conflicts
A consumer whose receipt shows that no service charge was included for a particular period may doubt the amount assessed. She may also believe that 20% is too high for a service charge. A consumer who believes she has been overcharged or mischarged may send a letter to the employer questioning the charge. If the charge is either course or excessive, she may not have the charge made in the first place. But because she was charged in both instances, her consumer rights depend on the law because a legal wrong has already occurred. An employee who believes an employer has mishandled a service charge may file a complaint with the Department of Labor, Division of Wages and Hours whether the service charge is handled correctly or not. A consumer challenged by unexpected or excessive service charges may complain to the Department Consumer Affairs, Bureau of Consumer Protection within the Department of Business and Professional Regulation. Claims alleging unfair or deceptive acts may be filed with the Attorney General. Claims for improper invoicing or charging of service charges not authorized by agreement or custom may be filed as a complaint with the Better Business Bureau. An employer may file an action requesting declaratory relief from a court on the issue of what amounts are required by law, or how those amounts should be calculated. Declaratory relief is timely whenever there is a legitimate claim that amounts have been improperly charged or calculated, and in many instances, is an important step that can avoid unnecessary disputes with consumers down the road. Regardless of the nature of the dispute, a consumer would be wise to follow the charge dispute procedures in the fair credit billing act. For example, for charges less than $50, under current rules, the consumer would first contact the merchant for resolution. When electronic methods are used, like the internet, the consumer may not be responsible if there has been a breach of security. If paid by card, the consumer must notify the card issuer within a "reasonable time." For all disputes, I recommend following the merchant’s dispute procedure as well. The phone number for the state attorneys general in Florida are listed here. Florida’s consumer protection divisions are based on the five judicial circuits. I have seen charge agreements that contain address information for customer service even when those addresses are not the location of the store, or the customer service manager. A local address is helpful for a consumer who wishes to personally deliver a copy of the correspondence or for a manager to directly address the concern.
Relevant Cases and Examples
Almost every employer has a story about how the service charge practices at their establishments have landed them in court. Service charge cases are rampant and in only the last few months, have included (1) a case out of Hialeah involving minimum wage, overtime pay, and alleged fraudulent payroll records; (2) a case against a resort in the Florida Keys alleging failure to pay an overtime premium for a "side job"; (3) a case against a Miami restaurant alleging false service charges; (4) an action brought against a high-end resort and spa alleging minimum wages, overtime pay, failure to meet overtime standards, improper rate calculations, failure to post proper postings, and alleged fraudulent payroll records; (5) a case brought against a Tampa resort alleging alleged fraudulent payroll records; (6) another suit against a Tampa resort seeking overtime compensation following payment of hourly wages; and (7) a case against a restaurant in Marion County alleging a failure to pay minimum wages. These headline-grabbing cases are unfortunately the tip of the iceberg. Service charge litigation is alive and thriving in Florida.
While a a series of case studies may be informative, it is a recitation of the applicable state law that will provide employers with the clearest understanding of the command of that law. The plain language of Chapters 509 and 561 provides that "service charge" is defined as "the mandatory addition of a specified amount to the price of any harbor room rental, dockage fee, or other marina service fee, not voluntarily requested by the customer."
Classifications of Service Charges
It is up to the individual employer to determine whether a service charge is a bona fide service charge, or whether it is an involuntary charge. This is determined in the first instance by the employer’s intentions, and then, in the second instance, by the filing of a complaint with the Division of Alcoholic Beverages and Tobacco, or the filing of a lawsuit.
Service Charges Vs. Gratuities
Under Florida law, a "gratuity" usually refers to a voluntary payment for a service performed, such as an employee’s conduct, or perhaps, a gratuity paid for the benefit of the employees. An example of what is meant by a gratuity is a "line-of-jobs" shared-tip system.
The statutory definition of service charges excludes a tip or gratuity "voluntarily added" by a customer to the price charge. In other words, the law distinguishes between service charges and tips or gratuities. The pivotal question is whether the amount pays is mandatory, or whether the guest voluntarily leaves a gratuity. If it is deemed to be "mandatory," it is a "service charge." While the hotel or restaurant may use the terminology "mandatory gratuity," if the guest is not free to accept or reject the charge, it is a service charge, not a tip or gratuity. The bottom line is that a voluntary charge by the guest for the benefit of the employee is a gratuity. A mandatory service charge assessed against the guest without the right to opt-out is a service charge.
Generally speaking:
- No "graft"
- No "grease"
- No "guff"
A "service charge" is not a percentage but rather an already "added" fee/premium.
Case example #1. In Palm Gardens of Ocala, Inc. v. Health Systems Trust, Inc., the Florida Supreme Court analyzed a "service charge" in the context of an apartment building. The apartment had a standard rent, but also charged an additional $30.00 per month as a "mandatory amenities charge." The Supreme Court of Florida found in favor of the former tenant as the $30.00 charge was a service charge under Chapters 509 and 561. In reaching the decision, the Court examined the Harbor Boat Bar, Inc. v. State Department of Revenue decision (254 So. 2d 74 (Fla. 1971), which analyzed the level or percentage of the charge, the statement describing the charge, the method in which the charge would be paid, etc.).
The deciding factor in Palm Gardens was that the additional $30.00 charge was "mandatory", just like the rest of the rent.
The tip charge was part of "rent" and anything other than the rent must be a service charge. Otherwise, there would never be a "tip charge".
Case example #2: The case of Ocean Reef Club, Inc. v. Department of Revenue examined the definition of "tip or gratuity". The court found that a "tip or a gratuity" means a "voluntary sum paid by a buyer to a seller as a thank you for service that is above an beyond remuneration to be expended in total performance of the seller’s duties." In effect, a "tip" paid by a customer for the benefit of the employee is not a "service charge" to the customer.
Case example #3. The case of Deauville Hotel Management v. Department of Revenue involved what appears to be the inclusion of "tips" in the hourly pay rate for waiters. The Court held that employers do not have a right to give an employee "credit" for tips when the worker does not receive tips. Thus, back to the above example, if a guest is not informed they have the right to accept or reject a "mandatory" charge, they have no choice. Accordingly, what might be referred to as a "tip" is actually a "service charge." Again, when the employer "adds" the service charge to the invoice without providing the guest with a choice to reject the charge, it is a service charge under Florida law. Some Florida establishments obtain a signature from the customer confirming the guest’s acceptance of the service charge. However, the signature is often the guest’s approval that the charge is being applied. What it does not indicate is that the guest actually "agreed" to pay the service charge. In fact, when an actual Gratuity is charged or added, it is typically noted as such in all capital letters so that it is visible.
Case example #4. As noted, Florida’s Wage Laws provides that a "service charge" is any "amount which is required to be added to the price of any harbor room rental, dockage fee, or other marina service fee, not voluntarily requested by the customer."
The Federal Fair Labor Standards Act ("FLSA") does not generally apply to restaurants and hotels, so service charge issues are most commonly addressed under state law, which, in effect, can mean that establishment employ different wage practices and methodologies.
Case example #5. Recently, two central Florida hoteliers were chased down by the IRS for taxes on "tips" collected by the hotel and allegedly divided among the workers. According to the hotels, the IRS was investigating the alleged "side job" practices of the waiters and waitresses. There are a few relevant takeaways from this case. First, the IRS is looking for evidence that an employer is not conducting its own compensable activities. Second, side job practices are a major source of wage issues. Third, if an outwardly named "tip" is actually a service charge, the possible liability for failing to report the charge as wages is significant.
In Miami, a hotel charged its male guest a higher rate than it charged female guests in connection with wedding packages. The case asserted a claim in violation of the Florida Civil Rights Act of 1992, claiming sex discrimination in the rates charged. Of importance in the case is the reference to "service charge" being charged so something in the context of actual "disparity of pay" between the men and the women. If the ladies paid less but actually received the "service charge" as well, the case might have been decided differently. In other words, it is the equality imposed on the "tip" that is important.
In another Florida court, the front desk manager of a resort in Southwest Florida is facing criminal charges for not reporting gratuities. The manager put together a manual that allegedly instructed resort workers to "keep tips a secret, don’t write them down, and call them ‘gifts.’" The manager faces a year in prison and a $1,000 fine if convicted. This case is illustrative of how serious the topic of tips is taken in the hospitality industry. The manager clearly fancies himself a "tip" investigator.
Trends in Service Charge Legislation
Economic, social and legal pressures are likely to continue spurring legislative efforts to define service charge laws in even more granular detail in Florida. For example, despite a national trend toward increased use of mandatory gratuities, see note 3, above, such as the "automatic" service charges more typically used in parties of six or more, the term "tip or gratuity" will remain undefined for the foreseeable future in the FLSA and the FMWA. If one assumes that "tip or gratuity" is similar to a "mandatory added tip, surcharge, or automatic gratuity" to be charged, one wonders whether a barista in line at Starbucks can add a "20% tip if you think our servers deserve it" charge to the bill. Or can a server in a sit-down cafe add a "19% gratuity if you appreciate our efforts" line to the bill? Is there a limit on the percent of the "mandatory added tip, surcharge, or automatic gratuity?" Is it different for taxes, ensuring that not too much is being collected? With as much time as the legislature has spent trying to understand the economic implications of these laws, the regulators and the courts may find themselves wondering the same questions if/when they are studied .
Further, economic factors – (1) what is the minimum wage, (2) how many hours must an employee work to be paid overtime, (3) what is the anticipated price of the commodity sold, (4) how big is the tip credit, (5) how much tax is required – are all under pressure. Even, as described in Radcliffe v. Entertain 2000, Inc., 2012 U.S. Dist. LEXIS 183666 (S.D. Fla. July 6, 2012), tip credit statutes may be challenged as "misleading" on the pie charts of the consumers required to decipher them.
Social factors – (1) is this fair to the servers, (2) is this just an automated way to increase the prices, and (3) are tips being reduced by employers having the servers pay for the "service charge" will influence how regulators and courts will view future tip legislation as well as how employees, employers, and ultimately, consumers, address service charge payments.
Finally, legal factors such as how to understand the Noerr-Pennington doctrine79 and the limits of commercial speech in this context, the costs to implement service charge legislation, the effectiveness of public service messages, and the like will continue to have a significant impact on whether service charge advocacy efforts survive.