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.

Close

Hotel Newswire Headlines Feed  

Jeff Clark
Tony Heung
Jeff Johnson
Chris Green
Raul Chacon
Brandon Billings
Sara Djubek
Robert M. O'Halloran
Lisa Cain
Coming up in June 2019...

Sales & Marketing: Selling Experiences

There are innumerable strategies that Hotel Sales and Marketing Directors employ to find, engage and entice guests to their property, and those strategies are constantly evolving. A breakthrough technology, pioneering platform, or even a simple algorithm update can cause new trends to emerge and upend the best laid plans. Sales and marketing departments must remain agile so they can adapt to the ever changing digital landscape. As an example, the popularity of virtual reality is on the rise, as 360 interactive technologies become more mainstream. Chatbots and artificial intelligence are also poised to become the next big things, as they take guest personalization to a whole new level. But one sales and marketing trend that is currently resulting in major benefits for hotels is experiential marketing - the effort to deliver an experience to potential guests. Mainly this is accomplished through the creative use of video and images, and by utilizing what has become known as User Generated Content. By sharing actual personal content (videos and pictures) from satisfied guests who have experienced the delights of a property, prospective guests can more easily imagine themselves having the same experience. Similarly, Hotel Generated Content is equally important. Hotels are more than beds and effective video presentations can tell a compelling story - a story about what makes the hotel appealing and unique. A video walk-through of rooms is essential, as are video tours in different areas of a hotel. The goal is to highlight what makes the property exceptional, but also to show real people having real fun - an experience that prospective guests can have too. The June Hotel Business Review will report on some of these issues and strategies, and examine how some sales and marketing professionals are integrating them into their operations.