Under California state law, restaurant “service charges” are the property of the employer. Employers can keep them for themselves, though they are allowed to pass them on to their staff to supplement their wages.1
However, various California cities have passed ordinances that require restaurant owners to pass on all service charge payments to their staff. Some of these cities include:
- Santa Monica4
What are service charges?
Also called operations fees, service charges are mandatory fees automatically added to restaurant bills in California. Customers cannot elect to not pay the service charge because it is part of the bill.5
How are service charges different from tips?
Whereas service charges are mandatory fees, gratuities are completely optional in California.6 It is perfectly lawful to pay a restaurant bill without leaving a tip, though it is customary to pay at least 15% in tips.
Note that many restaurants now have a no-tip policy and instead pass on service fee payments to their staff.7
Note that tips are not subject to sales tax, whereas service charges are. However, tips are subject to other taxes, such as social security.8
Can service charges ever be considered tips?
According to a 2019 California Appellate Court case, service charges can potentially be considered tips as a matter of law. To get around this from happening, restaurant employers should explicitly communicate to both their employees and customers exactly what happens to the service charges.
For example, employers are advised to explain what services charges – and where they go – on their:
- receipt and sales slips
- employee handbooks
- written tip-pooling agreements
- catering contracts (such as for private events)
This way, staff and customers cannot claim they were misled into believing that the service charges would go to the staff as opposed to the employer.9
What happens when service charges are used as tips?
When a California restaurant employer passes on some or part of their service charge payments to their staff as tips, the employer has to treat this money like wages. This means that the employer:
- must include the money on taxable gross receipts
- must withhold Medicare and Social Security taxes
- may not claim a credit against their tax obligations
- needs to include the money as part of the receiving employee’s regular rate of pay (for the purpose of calculating overtime).
Note that actual tips (as opposed to service charges distributed as tips) are typically not included in taxable gross receipts.10
What is double tipping, and is it legal in California?
Double tipping is when restaurant staff receives money from both:
- service charge payments, which their employer chooses to distribute to them; and
- actual tips left voluntarily by the customer.
There is no law that prohibits double-tipping in California.
What if restaurant employers violate local ordinances by keeping the service fees?
Restaurant staff who by local ordinance are entitled to service fees are advised to seek legal counsel to discuss bringing a wage and hour class action lawsuit against the restaurant. It may be possible to recover all back wages plus additional damages, such as late fees.11
- See Searle v. Wyndham Int’l (Court of Appeal of California, Fourth District, Division One, 2002) 102 Cal.App.4th 1327 (“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 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.”). See also Garcia v. Four Points Sheraton LAX (Court of Appeals of California, Second District, Division Three, 2010) 188 Cal.App.4th 364.
- Berkeley Municipal Code 13.99.050 (“Service Charges shall be used by the Employer to directly benefit the Employees. No part of these charges may be paid to the Employer.”)
- Oakland Municipal Code 5.92.040 (“”Service Charge” means all separately-designated amounts collected by a Hospitality Employer from customers that are for service by Hospitality Workers, or are described in such a way that customers might reasonably believe that the amounts are for those services, including but not limited to those charges designated on receipts under the term “service charge,” “delivery charge,” or “porterage charge.”” ).
- Santa Monica Municipal Code, § 4.62.040 (“An Employer shall distribute all Service Charges in their entirety to the Employee(s) who performed services for the customers from whom the Service Charges are collected. No part of these amounts may be paid to Employees whose primary role is supervisory or managerial. No Employer or agent thereof shall deduct any amount from wages or other compensation required by this Chapter due an Employee on account of a Service Charge, or require an Employee to credit the amount of a Service Charge, in whole or in part, against and as a part of the wages or other compensation required by this Chapter due the Employee.”).
- Publication 115, The California State Board of Equalization.
- Same. California Labor Code Section 351 LAB. California Labor Code 350 LAB.
- Elena Kadvany, ‘It’s here to stay’: These are the new restaurants eliminating tipping, San Francisco Chronicle (December 29, 2022).
- California Sales and Use Tax Regulation 1603. Taxable sales of food products. See note 5.
- Lauren O’Grady v. Merchant Exchange Productions, Inc. (2019, First District Court of Appeal) 41 Cal.App.5th 771.
- See note 5.
- Cindy Carcamo, City investigating Hollywood restaurants for allegedly keeping service fees, stiffing workers, Los Angeles Times (May 16, 2023)(“The city attorney is examining whether Ten Five Hospitality — the group that operated the five restaurants at the time of the allegations — violated an ordinance for allegedly keeping the entirety of the 5% service fee they charged to customers instead of distributing it to workers, according to an April 6 letter from Deputy City Atty. Joshua L. Crowell.”).