Group Sales Contracts, Service Charges, and Tips - What's in a Name?

By John R. Hunt Attorney, Stokes Wagner Hunt Martez & Terrell, ALC | September 23, 2018

This article is co-authored by Ashley S. Nunneker

In negotiating any kind of contract covering a group event, the use of the appropriate contract language to describe how those employees who serve the food and beverage functions will be compensated is essential on the part of a hotel or restaurant. Often, standard form contracts take this compensation for granted or use the terms "gratuity" and "service charge" interchangeably. This confusion can result in unintended consequences, including claims for back wages and overtime, lawsuits under state "tip" statutes, and even class actions. The following attempts to add some clarity to this area and identify best practices.

Gratuities are Voluntary

Hospitality guests historically have used gratuities to acknowledge excellent work performed by a hotel or restaurant's service staff. Servers, bartenders, buspersons, and other employees have come to expect and rely on gratuities as a major part of their compensation. At the same time, hotels and restaurants often will impose mandatory service charges in connection with certain events and functions. The simultaneous use of the terms "gratuity" and "service charges" by a business can lead to confusion. In consequence, an appreciation for the distinction between the two concepts is important.

Simply put, the difference between a gratuity and a service charge is that a gratuity is a voluntary amount paid by a guest in recognition of the service performed while a service charge is a mandatory fee imposed by a hotel or restaurant that usually is a fixed percentage of a customer's bill. In the case of gratuities, the amount is left to a customer's discretion and its payment is completely optional. Because the decision of whether to leave a gratuity is inherently voluntary on the part of the guest, the term "automatic gratuity" can be a misnomer. Although the terms "tip" and "gratuity" generally are synonymous, "gratuity" is preferred as the industry standard.

Properly classifying a payment as a gratuity is essential for two fundamental reasons. First, certain states do not subject gratuities to sales tax. These states include some of the more popular locations for conventions and meetings, such as Arizona, California, Florida, Georgia, Massachusetts, New York, and Washington.

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