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.

Choose a Social Network!

The social network you are looking for is not available.

Close

Hotel Newswire Headlines Feed  

Randa Tukan
Hans Ritten
James Gieselman
Sridhar Laveti
Laurie Friedman
Jonathan Wilson
Coming up in January 2019...

Mobile Technology: The Future is Now

Mobile Technology continues to advance at a relentless pace and the hotel industry continues to adapt. Hotel guests have shown a strong preference for mobile self-service - from checking-in/out at a hotel kiosk, to ordering room service, making dinner reservations, booking spa treatments, and managing laundry/dry cleaning services. And they also enjoy the convenience of paying for these services with smart phone mobile payments. In addition, some hotels have adopted a “concierge in your pocket” concept. Through a proprietary hotel app, guests can access useful information such as local entertainment venues, tourist attractions, event calendars, and medical facilities and services. In-room entertainment continues to be a key factor, as guests insist on the capacity to plug in their own mobile devices to customize their entertainment choices. Mobile technology also allows for greater marketing opportunities. For example, many hotels have adopted the use of “push notifications” - sending promotions, discounts and special event messages to guests based on their property location, purchase history, profiles, etc. Near field communication (NFC) technology is also being utilized to support applications such as opening room doors, earning loyalty points, renting a bike, accessing a rental car, and more. Finally, some hotels have adopted more futuristic technology. Robots are in use that have the ability to move between floors to deliver room service requests for all kinds of items - food, beverages, towels, toothbrushes, chargers and snacks. And infrared scanners are being used by housekeeping staff that can detect body heat within a room, alerting staff that the room is occupied and they should come back at a later time. The January Hotel Business Review will report on what some hotels are doing to maximize their opportunities in this exciting mobile technology space.