Restaurants and hotels in the hospitality industry often add an automatic service charge to customers’ bills. As we close out the year and head into 2026, businesses in the hospitality industry may want to take this opportunity to ensure they are complying with state service charge laws, which often include both consumer protection laws and employment laws.

Quick Hits

• Businesses in the hospitality industry may want to ensure they are complying with state service charge laws, which often encompass both consumer and employment regulations.
• In 2025, several states, including California, Colorado, Florida, and Massachusetts, enacted laws regulating or prohibiting automatic service charges, emphasizing clear disclosure and transparency to protect consumers and employees.

A service charge is not a tip or gratuity, and if the service charge is distributed to employees, it should always be included in an employee’s regular rate of pay for purposes of calculating overtime. While federal law permits an employer to keep all or a portion of the service charge and does not require any specific disclosure language, more states are passing their own laws that impact employers’ use of the service charge. Failure to comply with state service charge laws could result in significant damages and penalties to employers.

Changes in 2025

In 2025, several states enacted legislation that outright prohibited the use of “junk fees” (which can include automatic service charges often used in the...

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