Article contributed by Ilan Weiser, Ellenoff Grossman & Schole LLP
Many of New York’s leading hospitality establishments are being sued by their employees for illegally charging service or administrative fees to their customers. The lawsuits allege that those mandatory fees – paid by the customer and retained by the business– are really gratuities intended for the service staff.
Unfortunately, if the customer reasonably believes that mandatory fees are a gratuity, then by law, it belongs to the service staff and not the business. Therefore, a business must be overly explicit in communicating to its customer the purpose of such fee and that it is not a gratuity.
The business must always keep in mind that the law looks to what the customer reasonably understands the mandatory fee to be. For example, a customer may be confused if an invoice or contract lists a mandatory fee as a “Service Charge.” That label may imply that it is meant for the service staff as a gratuity. Instead, businesses should consider labeling a mandatory fee as an “Administrative Charge.” Also, a customer may not know that the business pays its waiters and bartenders well above the regular minimum wage (as opposed to a lower tipped-rate) and that the staff would not reasonably expect a gratuity in addition to their high wage. Again, the law is only concerned with what the customer believes the charge to be, so the business must be crystal clear in communicating to the customer, in writing, that the charge is not a gratuity.
That written communication must be accomplished in the specific method set forth in the New York Hospitality Wage Order. See 12 NYCRR § 146-2.19. It states, in effect, that:
- A charge for the administration of a banquet or special function shall be clearly identified as such and customers shall be notified that the charge is not a gratuity or tip.
- A reasonable customer must understand that the company’s notification is clear in that the charge is not intended to be a gratuity and will not be distributed to employees who provide service to guests.
- The notification stating that the mandatory charge is not a gratuity should be included on all documents concerning pricing.
- The notification shall be in ordinary language and appear in a font size similar to surrounding text, but no smaller than 12-point font.
The laws governing the assessment of mandatory fees are extremely strict and not employer-friendly. Most businesses are getting caught up in these lawsuits solely based on technicalities. For example, a business may include the proper notification that the charge is not a gratuity on the initial contract a customer signs. However, that language may arguably be insufficient if it does not also appear on all subsequent invoices sent to a customer and other correspondence that refers to pricing, such as email communications.
If the business does not follow all of the above necessary legal requirements, and a customer believes or is simply unsure if a mandatory fee is intended to be a gratuity, costly litigation may follow. These cases are usually filed as class actions and seek all mandatory fees collected by the business in the last six years. Certain weddings and other private functions can cost hundreds of thousands of dollars. Because many businesses charge a mandatory fee of more than 20% of a customer’s final bill, the resulting liability can be devastating. This is especially true for those businesses that rely on these mandatory fees as their main source of revenue.
The consequences of improperly assessing mandatory fees to customers should not only concern traditional restaurants or hotels operating in New York. The “hospitality industry” could also include other businesses that prepare and offer food or beverage, or a business that provides services in connection or incidental to such preparation and offerings. The regulation explicitly states that a catering business or even a company providing pre-made box lunches are subject to these requirements. And even if your business somehow does not fall within the definition of “hospitality” you still risk similar liability under New York Labor Law § 196-d.
These laws were originally drafted with good intention. Specifically, they were meant to stop a business from deceiving its customers and retaining fees paid by patrons who believed they were giving those fees to the business’s employees. In reality, a business is most likely charging its customer a mandatory fee merely to cover their overhead or administrative costs. However, many New York businesses have already fallen victim to these technical rules and regulations and more lawsuits continue to be filed each week.
Any business that is charging its customers a mandatory fee is urged to consult with experienced labor & employment counsel to ensure that the required disclaimer and notification is present on all necessary documents. If all requirements are not met, the business risks costly class action claims that will seek all mandatory fees collected for the last six years.
Ilan Weiser is an Associate in the Labor & Employment practice group at Ellenoff Grossman & Schole LLP in New York City. Mr. Weiser exclusively represents businesses of all sizes and sectors on how best to comply with the federal, state and local labor laws that govern their operations. Mr. Weiser’s principal area of expertise is employment law litigation and has vigorously defended hundreds of his clients in federal and state court and before various governmental agencies against claims of employment discrimination and unfair pay practices. Mr. Weiser has particularly in-depth knowledge of wage and hour law and regularly defends and counsels his clients in class and collective lawsuits concerning claims for unpaid wages. Mr. Weiser is also the Chair of the Labor & Employment Subcommittee of the New York City Bar Association Hospitality Committee. He can be reached by phone at 212-370-1300 or by email at firstname.lastname@example.org