If you have eaten out recently, you may have seen an additional charge at the bottom of your bill that says something like “health care 3%” or “3.9% mandate compliance surcharge.” As restaurant and other service-industry employers face growing employee costs further eroding already razor-thin margins, many increasingly add extra charges to their bills to help cover these costs. The CityPages recently published an article looking into the precarious restaurant situation and the use of service fees to try to ease the pain. However, mandatory service charges also face push back—with one restaurant group facing a lawsuit over their inclusion of a 3 percent wellness fee added to their bills. While most media attention has focused on such service charges in the restaurant industry, the service-charge rules apply to any service-oriented employers considering adding a service charge to their bills (For example, hotels often add a “resort fee” to their bills.). So, are these charges legal?
As with most things when it comes to the law, the answer depends upon the situation. A service charge or fee is a mandatory charge that is added to a customer’s bill in addition to the basic charge for products and services. Employers are not required to add service fees to their bills. Properly done, employers can legally charge customers a service fee. Improperly done, additional charges can be considered employee gratuities (a/k/a “tips”) under Minnesota law but income to the employer under tax law. As discussed in my prior post about the Dos and Don’ts of Tipping, Minnesota has strict laws about tipping policies. If you are an employer that is considering adding a service charge to customer bills, you will want to make sure your policies comply with these laws.
Under Minnesota law, any mandatory additional charge is considered a gratuity to the employee by default. There are two exceptions:
- A mandatory charge is not considered a gratuity if it would be completely unreasonable under the circumstances for the customer to interpret the charge as “payment for personal services rendered.” For example, it would be unreasonable for a customer to think the charge is a gratuity if an employee directly tells the customer that the charge “is not a gratuity.” However, relying on this type of exception is highly risky because it depends upon the facts of each situation and can easily be disputed.
- A mandatory charge is also not considered a gratuity if “clear and conspicuous notice” is provided to customers. The rules defining this standard are very particular about what type of notice is “clear and conspicuous.” However, the notice includes printing a statement that the charge “is not a gratuity” clearly in at least 9-point font on the menu or bill. This is the most common approach used by restaurants in the Twin Cities.
The use of service fees varies widely and is often rather ambiguous. If you decide to implement a service charge, you should also make sure that the service charge accurately reflects its purpose. For example, saying that a service charge is “mandatory” under state law is not accurate when the state does not require businesses to add the service charge. Similarly, a charge listed as a “wellness fee” should be used for wellness purposes. Some employers charge a “wellness fee” to cover only mandatory healthcare costs, such as insurance and sick and safe time pay. Other employers have found cost-effective plans that also enable the employer to provide basic health and wellness services to all of their employees. Improperly identifying the purpose of the charge could invite challenges from customers or employees—some employers segregate these funds for the identified use.
Another way to minimize customer complaints and other potential challenges to the charges is to fully train your staff on the purpose, use, and reason for the charges. If your staff is on-board and excited about the benefits, they can turn any customer questions into an opportunity for increased loyalty and appreciation. For example, employees explaining how they directly benefit from a wellness fee makes it personal. Some employers will even agree to drop the service charge if a customer still does not want to pay the charge.
Some employers do charge obligatory gratuities—particularly for large parties. The IRS considers obligatory gratuities to be service charges—not tips—and taxes them as part of your gross income. As explained above, however, Minnesota labor law considers these to be tips. Accordingly, you must distribute mandatory gratuities to the appropriate service employees while also treating them as business income and wages for tax purposes.
The increased use of service fees has generated significant discussion among customers and service-industry groups. Some opponents say they would rather see increased prices with postings explaining the increase or touting the benefits the increases provide. Others support the service fees and believe that the fees ensure that the money will be used for the stated purpose. Whichever approach you decide to take, you will want to make sure that you understand the potentially strict legal implications under Minnesota and local law.