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 was co-authored by Ashley Nunneker

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.


Hotel Newswire Headlines Feed  

Stephanie Hilger
Dean Minett
Nicholas Pardon
Ed Blair
Matt Schwartz
Robert M. O'Halloran
Chris Green
Eileen McDargh
Coming up in May 2019...

Eco-Friendly Practices: Corporate Social Responsibility

The hotel industry has undertaken a long-term effort to build more responsible and socially conscious businesses. What began with small efforts to reduce waste - such as paperless checkouts and refillable soap dispensers - has evolved into an international movement toward implementing sustainable development practices. In addition to establishing themselves as good corporate citizens, adopting eco-friendly practices is sound business for hotels. According to a recent report from Deloitte, 95% of business travelers believe the hotel industry should be undertaking “green” initiatives, and Millennials are twice as likely to support brands with strong management of environmental and social issues. Given these conclusions, hotels are continuing to innovate in the areas of environmental sustainability. For example, one leading hotel chain has designed special elevators that collect kinetic energy from the moving lift and in the process, they have reduced their energy consumption by 50%  over conventional elevators. Also, they installed an advanced air conditioning system which employs a magnetic mechanical system that makes them more energy efficient. Other hotels are installing Intelligent Building Systems which monitor and control temperatures in rooms, common areas and swimming pools, as well as ventilation and cold water systems. Some hotels are installing Electric Vehicle charging stations, planting rooftop gardens, implementing stringent recycling programs, and insisting on the use of biodegradable materials. Another trend is the creation of Green Teams within a hotel's operation that are tasked to implement earth-friendly practices and manage budgets for green projects. Some hotels have even gone so far as to curtail or eliminate room service, believing that keeping the kitchen open 24/7 isn't terribly sustainable. The May issue of the Hotel Business Review will document what some hotels are doing to integrate sustainable practices into their operations and how they are benefiting from them.