Hospitality Service Charge

What Is a Hospitality Service Charge?

A hospitality service charge is a mandatory fee added to customer bills in restaurants, hotels, banquet facilities, and other hospitality establishments. Unlike voluntary tips, service charges are compulsory amounts that customers must pay as part of their bill.

In California, the handling of service charges is governed by specific laws that distinguish them from tips and regulate how they must be disclosed and distributed. Mishandling service charges is a significant source of wage claims and class action lawsuits in the hospitality industry.

Service Charges vs. Tips: Critical Distinctions

Understanding the difference between service charges and tips is essential for compliance.

Tips (Gratuities)

Characteristic	Description
Customer discretion	Customer decides amount and whether to tip
Customer directed	Customer may specify which employee receives tip
Employee property	Tips belong to employees, not employer
No employer deductions	Employer cannot deduct from tips
Not wages	Not included in regular rate of pay

Service Charges

Characteristic	Description
Mandatory	Customer must pay the stated amount
Employer controlled	Employer decides distribution
Employer property	Service charges belong to employer unless distributed
Can be retained	Employer may keep all or portion (with disclosure)
Are wages	If distributed to employees, become wages

California Labor Code Section 351

California law specifically addresses service charges through Labor Code Section 351.

Key Provisions

Tips belong to employees: "Every gratuity is hereby declared to be the sole property of the employee"
Service charges are different: Mandatory service charges are not tips unless disclosed as going entirely to employees
Disclosure required: Employers must disclose how service charges are distributed
Deception prohibited: Misleading customers about service charge distribution is illegal

The Disclosure Requirement

California law requires clear disclosure when service charges are added:

Any employer who collects a service charge for employees must disclose to the consumer the amount of the charge and the percentage of the charge that will be paid directly to the employees.

Common Service Charge Scenarios

Banquet and Event Service Charges

Hotels and event venues typically add service charges (often 18-25%) to:

Catering events
Wedding receptions
Corporate meetings
Private dining rooms
Room service

Restaurant Automatic Gratuities

Many restaurants add automatic service charges for:

Large parties (typically 6+ guests)
Private dining
Special events
Delivery orders

Hotel Resort Fees and Service Charges

Hotels may include:

Resort fees
Housekeeping service charges
Porterage charges
Concierge service fees

Distribution of Service Charges

Option 1: Distribute Entirely to Employees

If the employer distributes 100% of service charges to employees who provided service:

Required Disclosure:

"A 20% service charge will be added to your bill. 100% of this charge is distributed to the employees who served you."

Consequences:

Distributed amount becomes wages
Must be included in regular rate for overtime calculation
Subject to payroll taxes
Must appear on wage statements

Option 2: Retain Service Charges (Employer)

If the employer retains all or part of service charges:

Required Disclosure:

"A 20% service charge will be added to your bill. This charge is retained by the establishment and is not a tip or gratuity for your server."

Or:

"A 20% service charge will be added to your bill. 50% of this charge is distributed to service employees and 50% is retained by the establishment."

Option 3: Partial Distribution

Many employers distribute a portion to employees while retaining a portion for:

Administrative costs
Credit card processing fees
Back-of-house staff
Management bonuses

Disclosure must specify the exact breakdown.

Calculating Overtime with Service Charges

When service charges are distributed to employees, they become wages and affect overtime calculations.

The Regular Rate Impact

Service charge distributions must be included in the regular rate of pay when calculating overtime.

Example Calculation

A server works 48 hours in a week:

Hourly rate: $17.00
Service charges received: $400

Step 1: Calculate total straight-time earnings

Base: 48 hours × $17 = $816
Service charges: $400
Total: $1,216

Step 2: Calculate the regular rate

$1,216 ÷ 48 hours = $25.33/hour

Step 3: Calculate overtime premium

8 overtime hours × ($25.33 × 0.5) = $101.32

Step 4: Calculate total compensation

$1,216 + $101.32 = $1,317.32

Common Mistake

Wrong: Paying overtime on base rate only

40 hours × $17 = $680
8 hours × $25.50 = $204
Service charges: $400
Total: $1,284

Correct calculation results in $33.32 more per week.

Required Disclosures

Customer-Facing Disclosures

Service charge disclosure must be:

Requirement	Details
Clear	Easily understood by average consumer
Conspicuous	Visible before purchase/order
Specific	States exact percentage going to employees
Accurate	Actually reflects distribution practice

Placement Options

Disclosures may appear on:

Menus (physical and online)
Receipts
Contracts (banquet agreements)
Posted signage
Event order forms

Example Menu Disclosures

Full Distribution:

"An 18% service charge will be added to parties of 6 or more. This charge is distributed in its entirety to the service staff."

Partial Distribution:

"A 20% service charge applies to all banquet events. Of this charge, 80% is distributed to service employees and 20% is retained by the hotel for administrative costs."

Employer Retained:

"A 15% service charge will be added to all room service orders. This is a fee for delivery service and is not a gratuity for any employee."

Wage Statement Requirements

When service charges are distributed, they must appear on employee wage statements.

Required Information

Item	Requirement
Total service charges	Gross amount distributed
Taxes withheld	Federal, state, FICA
Pay period	Period during which charges were earned
Regular rate	If affects overtime calculation

Record Retention

Maintain records for at least 4 years:

Service charge collections by event/shift
Distribution records by employee
Customer disclosures used
Overtime calculations showing service charge inclusion

Local Ordinances

Some California cities have additional service charge regulations.

Los Angeles Hotel Worker Protections

Covered: Hotels with 60+ rooms

Requirements:

Service charges must be distributed to employees who performed the services
Limited employer retention for costs directly related to providing the service

San Francisco

Additional disclosure and distribution requirements may apply to hospitality employers under local wage theft prevention ordinances.

Compliance Issues and Litigation

Service charges are a frequent source of class action lawsuits in California.

Common Violations

Violation	Consequence
Misleading customers	Unfair business practices claims
Failing to distribute as disclosed	Wage theft claims
Not including in regular rate	Overtime violations
Insufficient record keeping	Presumption against employer
Retaining without disclosure	Class action exposure

Notable Cases

Several major hospitality chains have paid multi-million dollar settlements for:

Labeling employer-retained fees as "service charges" implying employee tips
Failing to include distributed service charges in overtime calculations
Inadequate disclosure of service charge distribution

Penalty Exposure

Penalty Type	Amount
Unpaid wages	All amounts owed
Interest	10% per year
Waiting time penalties	Up to 30 days' wages
PAGA penalties	$100-$200 per pay period per employee
Unfair competition penalties	$2,500 per violation
Attorney fees	If employee prevails

Best Practices for Hospitality Employers

Policy Development

Decide on distribution method: Determine what percentage goes to employees
Document the policy: Create written policy on service charge handling
Train management: Ensure consistent application
Audit compliance: Regularly verify distributions match disclosures

Disclosure Checklist

Customer disclosures are clear and conspicuous
Percentage distributed to employees is specified
Disclosures appear in all relevant locations (menus, contracts, receipts)
Staff understands what to tell customers if asked
Digital ordering platforms include disclosures

Payroll Integration

Service charges are tracked by employee
Distributions are included in regular rate calculations
Overtime is calculated correctly
Wage statements reflect service charge earnings
Proper tax withholding on service charge wages

Record Keeping

Document all service charges collected
Track distributions to individual employees
Maintain copies of customer disclosures
Keep overtime calculation worksheets
Retain records for at least 4 years

Service Charges and Tip Pooling

Service charges and tips are handled differently in pooling arrangements.

Tip Pools

Must be distributed to employees who provide service
Cannot include owners, managers, or supervisors
Voluntary tips only

Service Charge Distribution

Employer has discretion (with disclosure)
May include back-of-house staff
May include supervisors if they provide service
Must be disclosed accurately

Technology Solutions

Modern hospitality management systems help with:

Tracking collections: Capturing service charges by event, shift, employee
Calculating distributions: Applying distribution percentages automatically
Regular rate integration: Including distributions in overtime calculations
Wage statement generation: Proper reporting of service charge earnings
Audit trails: Maintaining compliance documentation

Practical Example: Banquet Service Charge

A hotel hosts a wedding with:

Food and beverage: $10,000
Service charge: 22% ($2,200)

Distribution policy (disclosed to customer):

75% to service employees: $1,650
25% retained by hotel: $550

Employee distribution:

5 servers worked the event
Each receives: $330

Payroll treatment:

$330 added to each server's wages for the pay period
Included in regular rate for overtime calculation
Subject to payroll taxes
Itemized on wage statement

Proper management of service charges protects both the business from litigation and employees from wage theft, while maintaining customer trust through transparent disclosure.