Takeaway: Imposition of a service charge can provide certain employers with greater flexibility in their payroll. However, it is important to remember that it may be used only by employers whose employees are compensated well above the statutory wage rate and only if more than half the employees' compensation represents commissions on goods or services.
A mandatory service charge applied to diners' final bills was not a "tip" and is properly considered part of employees' regular rate of pay, allowing the employer to use those payments to satisfy its wage obligations under the Fair Labor Standards Act (FLSA) overtime exemption, the 11th U.S. Circuit Court of Appeals ruled.
The employer, an upscale steakhouse in Miami, charged customers an 18 percent service charge, which was added to their final bill. Customers could also add a voluntary, discretionary gratuity by writing in the desired amount on the final receipt or by leaving cash tips. The service charge, however, was non-negotiable.
From November 2017 through April 2018, employees were paid an hourly rate, an overtime wage and a pro rata share of the collected service charges. Service charge payments were processed through a point of sale system and distributed to employees using a point system to give each employee a prorated share of the total, minus 2.65 percent for credit card processing fees. The employer also distributed the additional gratuities to tip-eligible employees.
This pay structure changed slightly on...
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