Nathan Adams IV is a Partner in Holland & Knight's Tallahassee office
State and local minimum wage laws in several parts of the county and other factors have led some restaurants around the country to require mandatory tipping as a way to manage rising labor costs and to ensure equity between the front and back of the house. A mandatory or automatic gratuity is an automatic tip added to a customer's bill by management. Before you take this step, there are several repercussions to consider. First, some localities such as New York City have prohibited restaurants from assessing a surcharge on listed menu prices. 6 RCNY §5-59. Although there may not be a related private right of action, local government obviously has the authority to file claims under these laws. In these jurisdictions, mandatory gratuities raise an enforcement threat.
Second, in 2014, the Internal Revenue Service (IRS) began enforcing its mandatory gratuity rules, which classify an automatic gratuity as a service charge instead of a tip. The IRS treats service charges as regular wages, subject to payroll tax withholding. The IRS has identified the following four factors that must be present in order for a customer's extra payment to be treated as a tip, and not as a service charge: 1) the customer's payment must be made free from compulsion, 2) the customer must have the unrestricted right to determine the amount, 3) the payment should not be the subject of negotiation or dictated by the employer policy and 4) the customer has the right to determine who receives the payment.
Lastly, some enterprising plaintiffs have begun claiming that mandatory gratuities are a type of deceptive trade practice. Requiring customers to pay a price for an item above the price advertised, without first informing the consumer of the total cost, may be a basis to claim violation of deceptive trade and practice law. Specifically informing customers of any mandatory gratuity is an important defense to such a claim.
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