California Court Rules That Food And Beverage Service Charges May Qualify As Gratuities

Author:Mr James McDonald
Profession:Fisher Phillips LLP

A California appellate court just held that mandatory service charges added by banquet facilities to their contracts may need to be paid to banquet service employees essentially as a form of a gratuity. The October 31, 2019 decision changes up what some considered to be a settled area of law and may require you to immediately adjust your pay practices in order to get into compliance.

The Facts And Main Arguments

In O'Grady v. Merchant Exchange Productions, Inc., the employer added a 21% service charge to all banquet contracts for food and beverages. The company did not pay any of the service charge to servers. Rather, it distributed some of the money to managers and non-service personnel and retained the rest. Plaintiff Lauren O'Grady worked as a banquet server and bartender at the Julia Morgan Ballroom in San Francisco, a facility owned and operated by Merchant Exchange Productions. She sued her employer claiming the practice described above violated Labor Code section 351 and also amounted to intentional interference with advantageous relations, breach of implied contract, and unjust enrichment.

The employer argued that no such legal claims could be pursued, relying on two prior cases: Searle v. Wyndham International, Inc. and Garcia v. Four Points Sheraton LAX. Both of these cases contained language stating that mandatory service charges are not gratuities under Labor Code section 351. That statute provides that all tips and gratuities left by customers for service employees are solely the property of the employee and that employers may not take any portion of such gratuities. The lower court agreed with Merchant Exchange Productions and dismissed the claim.

Court Of Appeal Surprises Employer And Creates New Standard

But the First District Court of Appeal was not content to apply the language in Searle and Garcia. It distinguished those cases, observing that Searle did not involve section 351 at all but rather a customer's complaint that a service charge was deceptive. It also noted that Garcia actually upheld a City of Los Angeles ordinance requiring that service charges imposed by hotels in the “LAX Corridor” be paid to employees performing the services.

The appellate court maintained that to define gratuities only as those amounts of money left voluntarily by a patron for a service employee is to take too narrow a view. It noted that tip pooling, which is lawful in California, does not reflect the customer's preference as to whom...

To continue reading