First Circuit Sides with Employer in Massachusetts Tips Act Case Concerning Service Charges

The Massachusetts Tips Act is a complicated statute that regulates what an employer can and cannot do with tips left by customers and with service charges paid by customers. You can read more about the Tips Act here.

Most disputes under the Tips Act involve an employer distributing or pooling tips in violation of the act, usually by allowing individuals to take tips who are not authorized to do so under the statute as they are not a ‘wait staff employee,’ a ‘service bartender,’ or a ‘service employee.’ By definition, anyone with any amount of managerial authority cannot participate in a tip pool and cannot fall into one of those three categories.

WHAT IS THE DIFFERENCE BETWEEN AN ADMINISTRATIVE CHARGE AND A SERVICE CHARGE ACCORDING TO THE MASSACHusETTS TIPS ACT?

A lesser known provision of the Tips Act regulates service charges and prohibits employers from retaining ‘service charges’ paid by a customer and requires those charges to be directed to the three categories of employees listed above. The specific language at issue is the following:

If an employer or person submits a bill, invoice or charge to a patron or other person that imposes a service charge or tip, the total proceeds of that service charge or tip shall be remitted only to the wait staff employees, service employees, or service bartenders in proportion to the service provided by those employees.

Pretty straightforward. If you charge a service charge, you must distribute that service charge only to wait staff employees, service employees, or service bartenders in proportion to the service provided by those employees.

However, the Tips Act does allow for employers to charge an ‘administrative charge and to retain that charge in its entirety, so long as they clearly explain that the charge is retained by the employer and not distributed to employees. That’s known as the ‘safe harbor’ provision and allows employers to retain certain charges in compliance with the Massachusetts Tips Act. The specific language at issue is the following:

Nothing in this section shall prohibit an employer from imposing on a patron any house or administrative fee in addition to or instead of a service charge or tip, if the employer provides a designation or written description of that house or administrative fee, which informs the patron that the fee does not represent a tip or service charge for wait staff employees, service employees, or service bartenders.

Certainly what a fee is called will be relevant in determining if a customer thinks the fee is retained by the employer or distributed to waitstaff. Equally important, however, is how the employer describes the fee and what it tells its employees to say to customers who ask about the fee.

The case of Lazo v. Sodexo, Inc., recently decided by the First Circuit, explains how these concepts work in practice.

Sodexo is a food service and facilities management company, operating across the United States, including at One Lincoln Street in Boston, at which it operates cafeterias for two clients: K&L Gates and State Street Bank. These two clients paid Sodexo directly for these services. Plaintiffs worked for Sodexo at these locations as wait staff. Sodexo also operates at the Plimoth Plantation in Plymouth, Massachusetts.

Sodexo charged an administrative on its services, ranging from 18% - 20%. Sodexo described these fees in various ways during different periods, including

  • identifying the fee as a “staffing charge” or “support charge” on invoices,

  • calling it an “administrative charge” on invoices and stating: “The administrative charge does not represent a tip or service charge for wait staff employees or bartenders,”

  • calling it an “administrative fee” and stating on invoices that the fee was “not a gratuity, but covers labor expenses for staffing your event and may exceed our actual labor cost,” and

  • calling it an “administrative fee” and stating on invoices that the fee was “does not represent a tip or service charge paid directly to wait staff, employees or bartenders but is a charge to cover our operational costs and no additional gratuity is required.”

  • prior to 2015, providing no written description and instructing staff to tell the customers that it was a fee retained by Sodexo.

Three plaintiffs filed suit, arguing that the administrative, support, and staffing charges should have been distributed to them as tips. The First Circuit held that Sodexo satisfied the safe harbor provision’s requirement that an employer can retain an administrative charge so long as it explains to the customer that the fee is not distributed to wait staff. Importantly, the Court held that this designation did not need to be in writing. In doing so, the Court credited testimony from Sodexo’s customers that they were told that Sodexo retained the fee in its entirety. The Court held that the written designations listed above complied with the Tips Act’s safe harbor provision.

If you are a Massachusetts tipped employee and you have questions about whether your employer is unlawfully withholding service charges and/or administrative charges call us today for your free consultation.