By Beth O’Neal, Esq.

My company owns and operates a large resort on Cape Cod. Our facility includes restaurants that are open to the public and also function rooms that are available for private functions (such as weddings and reunions). Our pay structure is different for our employees who work in the restaurant and those who work at private functions. For employees working at private functions, we charge a fee to the customer, typically between 18 percent and 25 percent, that is called a service fee. Part of this fee is distributed to the wait staff and bartenders; part is kept by the “house;” and yet another part is paid to the event coordinator. The wait staff who work at the private functions receive minimum wage, $11 an hour, plus that part of the service fee we have earmarked for them. I was recently told by one of the wait staff that how we are paying the wait staff who work at the private events is not legal. I thought because we were paying them minimum wage, we were not required to pay them any gratuities and could decide how much of the service fee to share with them. Am I or the wait staff employee correct?

This is a somewhat complicated and often litigated issue. There are two separate Massachusetts laws in play here. The first one I will address is known as General Law chapter 151, sections 1 and 7. This is the minimum wage law. It permits employers to pay “tipped” employees (which means those employees who regularly receive at least $20 a month in tips) less than the required minimum wage (now $11 an hour), but no less than $3.75 an hour (“service rate”), if certain conditions are met. They are (i) the employer must notify its employees, in writing, of the law allowing the employer to pay the employee less than required minimum wage; and (ii) the employee to whom the employer pays less than the required minimum wage must actually receive tips in an amount which, when added to what is called the service rate (being not less than $3.75 for wait staff ) equals or exceeds the required minimum wage; and (iii) all tips received by the employee must be retained by the employee or if they are pooled, the tip pooling arrangement must comply with General Law chapter 149, section 152A (discussed below).

Under the minimum wage law, if a tipped employee who is being paid $3.75 an hour (or whatever is his/her hourly rate of pay less than $11 an hour, but no less than $3.75 an hour), plus tips, does not earn at least $11 an hour, the employer must make up the difference between the hourly rate (which may be less than $11 an hour but not less than $3.75 an hour) plus tips, and $11 an hour. So, if an employee was paid $3.75 for 20 hours of work, and earned tips during those 20 hours in the amount of $50, this would equal $6.25 an hour for the 20 hours. The employer would need to make up the difference and pay the employee another $90, so the employee earns $11 an hour for her 20 hours of work.

The second law is known as General Law chapter 149, section 152A, known as the Tips Act. It sets out requirements for the earning, keeping and pooling of tips where tips are customarily earned by certain employees, identified below.

This law protects identified employees, including “wait staff employees” and “service bartenders.” Wait staff employees are expressly limited to those employees who: (1) serve beverages or prepared food directly to patrons, or who clear patrons’ tables; (2) work in a restaurant, banquet facility, or other place where prepared food or beverages are served; and (3) who have no managerial responsibility. Such employees include, specifically, waiters, waitresses, bus persons, and counter staff. “Service bartenders” are defined as persons who prepare alcoholic or nonalcoholic beverages for patrons to be served by another employee, such as a wait staff employee.

The law prohibits an employer from requiring or permitting any wait staff employee or service bartender to share tips with any other employee who is not a wait staff employee or service bartender. As an example, no waitress or service bartender can be required to share her tips with a hostess; or a front of the house manager; or any of the kitchen staff. Tip pooling where tips are shared among waiters, waitresses, bus boys/girls, and bartenders is permitted. The applicability of this law to wait staff employees and service bartenders does not depend upon whether they are paid a service rate, or they are paid, as an example, $15 an hour. It applies to them based upon their being wait staff employees and service bartenders, who receive tips or gratuities that the law provides belong to them, and no one else.

This same law also addresses what is referred to as a service charge, administrative fee or house fee, as well as how such fees are lawfully handled.

Where a service charge is imposed by an employer upon a patron or customer in lieu of a tip to any wait staff employee or service bartender, including any fee designated as a service charge, tip, gratuity, or a fee that a patron or other customer would reasonably expect to be given to a wait staff employee or service bartender in lieu of, or in addition to, a tip, no portion of the service charge may be shared by any employee other than a wait staff employee or a service bartender, nor may it be shared with the employer. Based upon what you describe, the service fee is being improperly handled and should only be paid over to and shared among wait staff and service bartenders in proportion to the service provided by those employees. It is also important to note that any service charge should be paid to the wait staff employee or service bartender by the end of the same business day, and in no case later than the time set forth for timely payment of wages under Massachusetts law (i.e., where the employee works 5 or 6 days in a calendar week, wages must be paid within six days of the termination of the pay period during which the wages were earned; where the employee works 7 days in a calendar week, wages must be paid within seven days of the termination of the pay period during which the wages were earned; where the employee has worked for a period of less than five days, wages must be paid within seven days after the termination of the work period).

However, you may charge a fee, such as a house or administrative fee in addition to or instead of a service charge, but only if and where you provide a designation or written description of that house or administrative fee, which informs the patron that the fee does not represent a tip or service charge for wait staff employees or service bartenders.

It is important to keep in mind that the intent of the Tips Act is to ensure that wait staff employees and service bartenders receive all of the proceeds of the tips, gratuities, and service charges that customers intend them to receive. As a result, the interpretation of a “service charge” must and will reflect that intent. Consequently, where an employer seeks to charge a fee to be retained by the employer or paid over to other employees who are not wait staff or service bartenders, the employer must be clear in its written designation to its customer what the fee being charged is for. Simply calling it an “administrative fee” is not enough. In a case recently decided by the court, where a hotel’s written designation of the fee imposed upon event customers simply referred to an “administrative fee,” the court said it was not a sufficient designation to dispel the possibility that the customer would reasonably believe that the additional charge of 18% or 19% of the amount invoiced for food and beverages was indeed a gratuity. In your situation, you may wish to separate out that part of the so-called service fee, identify it as a “service fee” or “wait staff/bartender gratuity,” and when collected, share it only with wait staff and service bartenders.

That part of what you have been collecting as the service fee, to be retained by you or paid to the event coordinator, should be identified separately and labeled differently, and include language informing the customer that the fee does not represent a tip or service charge for wait staff employees or service bartenders.

The risk of not taking these steps, and very strictly complying with the described laws, is significant. There are plaintiffs’ lawyers who have made highly successful practices out of taking and pursuing tip cases. They can be and often are pursued as class actions. A violation of the laws can subject the employer to mandatory multiple damages and mandatory attorneys’ fees, in successful cases. They will also subject the employer to 12% annual interest on amounts that should have been paid to the wait staff employees and service bartenders.

Individual liability against the officers and managers of the employer may be imposed. Many well-known restaurants and special event locales have been sued for their non-compliance with these laws including Starbucks; Dunkin Donuts; Cape Codder Resort and Spa; Domino’s Pizza; Legal Seafoods; Four Seasons; Maggiano’s Little Italy; Smith & Wollensky; Marriott Hotel; Weston Golf Club; and The Palm Restaurant.

Understanding the intricacies of these laws is important to your business and should be reviewed with your attorney to insure full compliance.

Beth O’Neal, Esq., is a partner in the Boston law firm of Conn Kavanaugh Rosenthal Peisch & Ford LLP. Send questions to moneal@connkavanaugh.com.

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