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Jul 18, 2013 06:26 AM

A tipping class action lawsuit

So a guy is suing restaurants in NY for adding 18% gratuity to checks for parties of less than 8 people. The restaurants named range from TGIFridays to Per Se

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  1. If I've read that correctly, it seems it is illegal in New York City to levy a service charge (or whatever you would call it in America) on tables of less than 8. Which, to me, seems like an unwarranted restriction of a business' trading. Surely, so long as it is made clear that these are the terms of business under which you eat, I do not see what on earth the problem might be.

    By the by, as a matter of accuracy, Per Se does not appear to add anything and specifically states, on its website that service is fully included in the menu price.

    12 Replies
    1. re: Harters

      Harters, I know you are in the UK. In the USA we don't have a national sales tax or VAT. Sales taxes may be imposed by state government, county government and municipality. Therefore in some locations three levels of tax are added to the diner's bill.
      Service charge added to the bill by the restaurant is subject to sales tax in some jurisdictions. A gratuity added to the bill by the diner is not subject to the tax.

      So if Per Se includes a service charge of $18 in a diner's bill then the diner may see another $1.80 (10%) in added tax cost. This can add up over time for someone who dines out regularly, especially taking clients out in a large city.

      I like the concept of paying what the menu states with no additional charges--service and VAT inclusive (as I've run into in Europe), but as long as sales tax is being added on to the bill, I prefer not to give the government additional tax on a mandatory gratuity or servioce charge.

      1. re: bagelman01

        Understood.Sort of.

        So, when an American restaurant declares that it will add a percentage gratuity to the bill, for larger groups, is this legally a gratuity or a service charge liable for sales tax?

        Still taking the Per Se example, I don't read their website as saying they add a service charge to the diner's bill - I read it that they say service is included in the food price - "Prix fixe 295.00 service included".

        1. re: Harters

          In many jurisdictions (including Connecticut, where I live and practice law), if the restaurant adds the charge automatically it is subject to sales tax. It does not matter whether the restaurant labels it gratuity or service charge.
          Again, we have hundreds if not thousands of tax jurisdictions in the USA and rules vary.

          If the restaurant presents a diner a bill for a meal, the sales tax is already calculated and on the bill, then the diner adds a voluntary tip/gratuity and that is not subject to sales tax.

          Looking at the Per Se example of $295 prix fixe including service. The diner would be charged sales tax on the $295. If The actual meal would be $250 and Per Se was adding 18% ($45) to get to the $295 total, then the diner is being taxed approx 9% (I don't know the exact local sales tax rate off the top of my head) on that $45, that is an unecessary tax burden of more than $4 per head every time one would dine at Per Se.
          If one can afford to dine at Per Se, that tax burden would not break the diner, but I would rather give the server a larger tip or give the $4 to charity, not the government.

          1. re: Harters

            This subject is somewhat tricky, but if a service charge is stated on the menu, customers are required to pay it so it's part of the cost of the meal. Hence, it would typically be subject to sales tax. However, the wording on the menu may make a difference as to whether a customer is obligated to pay a surcharge. The word "gratuity" has been interpreted as a voluntary gift and not enforceable should a customer refuse to pay it.
            Most savvy restaurants would use the phrase "service charge" rather than "gratuity."

            1. re: Harters

              Thanks for the further explanations. Certainly differences to our situation in the UK. We have a few places (growing) that charge like Per Se with service included in the menu price and very many more which add a discretionary service charge in place of old-fashioned tips. Our Value Added Tax (similar to American sales tax) is always incorporated into advertised prices, at 20%, so any tip or service charge is calculated on a tax inclusive basis.

              By the by, on our last trip to New York City (2007), bills often had a gratuity already added. Being British, we were used to looking at bills to see if service charges are added or if a cash tip is needed but we wondered how many folk that might catch out who then end up double tipping because they don't expect the auto gratuity on small parties.

              1. re: Harters

                Tipping on top of an already added on tip is a common complaint on these boards. Many diners don't see the first tip on the bill. In some cases the restaurants are not that well lit, in some cases the diners, having much to drink are 'lit.'

                Many think this is a scam to get more money from the diner. The other tip increasing practice that is objectionable but common: Server brings the bill, diner sees the breakdown: Food and drink $100 tax $8.50 total $108.50. Diner hands the server a credit card. Server returns with a credit card slip to be signed: $108.50 + Tip______Total $___.
                BUT the original bill is NOT in the folder.
                A diner who typically leaves 20% would leave $20 for $100 food/drink, but presented with a charge slip with a total of $108.50 might easilly leave $21.70. Another $1.70 out of the diner's pocket for no additional purchase or service. I always insist that the server bring back the original bill. If they hesitate I simply say that 'accounting requires an itemized bill, some items are not reimbursable." Works every time.

                1. re: bagelman01

                  Similar scams occur here in the UK.

                  In the old days when we had credit card slips, leaving the tip line open, after levying a service charge resulted in a campaign to expose restaurants doing it. Now we have "chip and pin" cards, it happens much less but restaurants can and do leave the credit card machine programmed to ask if you want to leave a tip.

                  Place near me is notorious for doing it. I knew of the scam so didnt fall for it when the waiter said "Press this button to leave a tip". I said "Isnt there a service charge". He said "Service charge is not tip". I said "I think you'll find it is".

                  I'm a great fan of the French/Belgian/Spanish system where service is fully and properly accounted for in the menu price, which I suppose is what Per Se is doing as well.

                  1. re: Harters

                    You could have replied "You are absolutely correct, as in this instance the service charge is set (by you) at xx% and the tip is set (by me) at 0%. So I quite agree that they're not the same thing, not at all."

                    1. re: Harters

                      In the US, a service charge is not the same thing as a tip. Other than the sales tax issue, there is also the issue of whom the money belongs to. In most states, the restaurant has no legal obligation to pass on a service charge to the servers (although most restaurants likely will do so), whereas tips can't be touched other than by policies for how to divide them between the front-of-the-house staff.

                      1. re: nocharge

                        Exactly the same situation in the UK with employers not obliged to pass it on to servers. There's also a "grey area" if tips are given by card payment rather than cash.

            2. re: Harters

              I have not encountered a charge for fewer than 8, but I have seen it tacked on to parties greater than 8.

              1. re: Candy

                A place we go to in CT has printed on the menus that gratuity is included for tables of four or more.

            3. I really get annoyed when people complain about tipping. It's just word play, it's the servers *wages*. It's part of the cost of going out to eat, period.

              I'm sick of hearing the "incentive" excuse as well, do *you* work for tips? Would *you* like it if your boss decided not to pay you for a given days work because you were playing around on Facebook at your desk and not getting much done?

              If the restaurants should be getting sued for anything, it should be for the tip pooling they force their servers into - which is against the law. I know TGI Fridays does this, as I used to work there years ago. They should be sued for paying their staff below minimum wage. Don't take it out on the servers.

              If the restaurants want to factor the costs for their staff in via a mandatory "gratuity" on all checks, they should have just raised all the prices of their menu a bit instead, then paid their staff a reasonable hourly wage. Putting it on the check like that and listing it as a "gratuity" is only going to freak out customers and cause them to bitch and complain about it, and make them feel like they're getting ripped off.

              15 Replies
              1. re: Atomic76

                The general issues and many specific issues surrounding tipping in American restaurants (below-minimum wages, tip credit, why we tip, how much we tip, why the system is this way, take-out/delivery/buffets/wine, tipping and taxes, credit card tips, tip pooling, etc.) have been hashed out in other threads. Quick summary: everything can be argued from every direction, everyone feels strongly about their own opinion and has trouble seeing it any other way, and if they're not already annoyed and angry when the discussion starts, they certainly are by the time it ends in flames with no one having budged an inch.

                I think it would be more useful in this thread to stay focused on the lawsuit that the OP brought to our attention, and on the specific topic of automatic gratuities for smaller parties (which you get around to in your last paragraph, and I agree completely with what you say there).

                1. re: Atomic76

                  While I agree with your point that the tip is part of the cost of going out to eat, I take issue with points you raise.

                  We have no national law on tip pooling, but have federal court decisions on who may share in the pool. So, in state A it may be illegal to force employees to pool tips, in state B it may be perfectly legal to make this a term of employment.

                  Raising the prices to pay servers a higher wage costs the patron more than the current price PLUS the tip. I have posted about this countless times, but here we go again.

                  Menu cost $100 plus 20% tip = $120 plus 8% sales tax on $100 +$128 cost to patron

                  New Menu cost including tip $120 plus 8% sales tax (9.60) = $129.60 cost to patron. The $1.60 may not seem like much to you, but in my personal and business entertaining expense it would cost me/my business more than an extra $1500 per year, and NOT ONE CENT of this increased cost would end up in a server's pocket.

                  And yes, I worked my way through college (40+ years ago) as a waiter/bartender, and my 25 YO works weekends as a server to pay graduate school expenses.

                  When the total cost goes up, diners eat out less often. Patrons will not look at the higher menu price and say, gee the servers are making more, they will look at the prices and say Restaurant X is getting too expensive for that plate of pasta.

                  1. re: bagelman01

                    bagelman, I don't disagree with your comments, but a lot of us do tip 20% on the total including tax, so I'm typically paying the $129.60 anyway. I would rather have all costs inclusive plus tax. In my scenario, the server gets the extra money but in your $120 plus 8% scenario, I agree the $1.60 is just extra tax.

                    1. re: bagelman01

                      Using your example above the final % increase to the patron is 1.25%

                      ($1.60/$128.00) * 100

                      I have a hard time believing 1.25% is going to drive a significant alteration in consumer behavior long term. Diners will, as they always have, get used to the higher prices. And while $1,500 may sound like a large number when stated that way it is STILL only 1.25% of your business entertainment expense which if you do the arithmetic must be $120,000

                      1. re: kmcarr

                        $120K is a small year for business entertainment expenses. I own a law firm and wife is in Real Estate/construction and design.

                        The point is none of the extra cost goes to the server and defeats the underlying theory of the poster

                    2. re: Atomic76

                      the financial upside to servers from the tipping culture can be rather large.

                      funny you aren't arguing for a change in tipping culture, you're just arguing for a floor on tipping.

                      >> They should be sued for paying their staff below minimum wage.

                      Then file a lawsuit.

                      >> If the restaurants want to factor the costs for their staff in via a mandatory "gratuity" on all checks, they should have just raised all the prices of their menu a bit instead, then paid their staff a reasonable hourly wage.

                      what's the difference? If they aren't paying their staff enough, how do they retain employees?

                      1. re: Dustin_E

                        Dustin--atomic can't file a suit claiming staff is paid below minimum wage unless, he is either staff (making the allegation), attorney for staff or the parent/guardian of a minor (making the claim) or the executor of the estate of a deceased staff member (claiming on the deceased's begalf) OR thew suit would be thrown out of court for lack of standing.
                        Just being pissed off that a wage law may have been broken doesn't give rise to a suit.

                        and as an aside , tipping income varies widely. My 25 YO works in a trendy bar/restaurant-music venue on the weekends. She is paid a base of $5 per hour which exceeds the state requirement for servers. Unless it is dead due to weather cnditions, she averages $200 per 5 hour shift. There is no way that the establishment could raise menu prices so much as to pay her $45 per hour. She has worked elsewhere, but finds that urban 20 something drinkers tip large.

                        1. re: bagelman01

                          got it -- i read "there years ago" as "three years ago" -- presumably the statute of limitations wouldn't have lapsed in this amount of time.

                          thanks for the example of your daughter -- i don't doubt tipping varies widely. a family friend currently works as a cpa, but bemoans she made a lot more money working as a server. she hates fixed tip amounts because she prefers to top more if the server does a good job.

                          >> I really get annoyed when people complain about
                          >> tipping. It's just word play, it's the servers *wages*. It's
                          >> part of the cost of going out to eat, period.
                          >> I'm sick of hearing the "incentive" excuse as well, do
                          >> *you* work for tips? Would *you* like it if your boss
                          >> decided not to pay you for a given days work because
                          >> you were playing around on Facebook at your desk and
                          >> not getting much done?

                          I would like it if by doing a passably good job I got paid 50% to 200% more than i would anywhere else -- which is perhaps the other side of the tipping coin.

                          Anyway, i don't think it is a problem if horrible service is rewarded with a horrible tip.

                          And i think tip pooling makes sense to the extent it levels compensation between servers and back-of-house kitchen staff.

                          1. re: Dustin_E

                            I think that you may have quite a different understanding of tip pooling than is practiced in many places.

                            In most places that I have worked/owned or daughter has worked, the tip pool is only shared by front of house service employees: servers, hostess, busperson, bartender/barback, runners. Kitchen employees get no share in the pool. Kitchen employees must be paid at least full minimum wages. They cannot be paid the legal reduced minimum wage for servers who can legitimately expect tips to make up a good percentage of their income.

                            A server is not just a servant who waits on a table and delivers food/drink. A server is a salesperson. The more items sold and the more expensive the item, the greater the bill. Just as a salesperson in a fine jewelry department, or better clothing or shoes or automobile draws a small salary and earns commissions on each sale, the server builds the sale in hopes of increasing the tip-the commission on the sale,

                            1. re: bagelman01

                              >> I think that you may have quite a different understanding of tip pooling than is practiced in many places.

                              A place in san francisco named "Alfred's" shares it with kitchen staff. yeah, this might not be common. So what is the problem with tip pooling? Just that servers don't like it because they end up with less money?

                              >> A server is a salesperson

                              interesting point, though i think this holds a lot more at a bar / club than at a restaurant. Is the server's ability to upsell at a restaurant really that strong?

                              in my experience, whenever a server tries hard to get me to order something more / more expensive, it usually comes across as rude and unpleasant, and is sometimes cause for me to leave a mediocre or bad tip.

                              1. re: Dustin_E

                                Everytime you sit down in a restaurant and the server starts telling you the evening's specials, the server is selling. It is part of the job and servers are instructed to build the sale.

                                Not all upselling has to be rude or pushy, often it is sublte such as asking if you want sauteed mushrooms and onions with your steak. No immediate mention of the additional cost.
                                Asking if you want coffee and/or dessert after your main course is also selling.

                                If you go into a restaurant for 1 19.95 entree, and the server asked what drink you'd like to start with and you don't say 'tap water' means a sold beverage, the suggested appetizer, coffee, dessert are only mentioned to build the sale, not because the server thinks there's still room in your belly.
                                So $19.95 entree + $3 soda + $2 coffee +$5 dessert, makes your $20 meal into a $30 meal and would yeild the server an extra $2 in tip income.

                                Some restaurants have contests to see which server can sell the most of a special or sell out the particular special quickest. All sales contests with rewards to the server. Never mind spiffs or push money paid not by the restaurant but by suppliers.

                                Last week at my daughter's place of employment, they had a Summer Shandy noght sponsered by a beer co., Free t-shirts and cozies for the patrons. Daughter got a free six pack for every 6 Summer Shandies she sold and the server who sold the most Summer Shandies that night got a crisp $50 bill from the beer distributor salesperson.

                                1. re: bagelman01

                                  Bagelman, I'm confused. Are they servers trained to upsell or are they sales clerks trained to serve? Do I have to pay them extra to serve my food and pay tax on it? Is the service charge in addition to an automatic gratuity? Is the service charge akin to a mechanic adding a labor charge?

                                  1. re: mucho gordo

                                    New hires at the establishment where 25 yo daughter works are taught to serve and sell in the same training course.

                                    Runners and hostesses often help serve, but never sell, BUT they get tipped out by the server and the better job the server does selling the bigger the tip-out.

                                    Parts = menu price
                                    Labor = Tip/gratuity/service charge, call it what they may. In many states, such as CT, the parts are taxable, the labor is not. BUT if it is an automatic gratuity or service charge added by the establishment it is subject to sales tax.

                                    1. re: bagelman01

                                      Must be having a senior moment. I'm still not clear; do they add service charge AND tip/gratuity?

                                2. re: Dustin_E

                                  What is shared with the kitchen staff at Alfred's is a mandatory service charge, not tips, according to the fine print on their menu. The restaurant can do whatever it wants with the proceeds from the service charge.