By: Erik Allgood*
Abstract
Rising costs and inflation rates have created difficult times for both service industry employers and their employees. Business owners often implement service charges to offset their costs. But problems arise when employers try to siphon off service charges, effectively reducing total wages paid to their employees. Attempting to address this problematic ambiguity, courts have determined that service charges are not tips if the amount is fixed, non-discretionary, and included in the employer’s gross receipts. Whether service charges are discretionary, however, is difficult to determine because the charges are ambiguously worded, and employers often remove the charges at a customer’s request. The circuit courts have consistently upheld that service charges are not tips under the “discretionary” rule, but district court decisions are more varied in their interpretations.
A consistent treatment of service charges is necessary because service charges implemented by employers who pay their employees minimum wage—currently $2.13 per hour for tipped employees and a tip credit that must be at least $5.12 an hour—contravene the Fair Labor Standards Act’s (FLSA)’s purpose of ensuring employees a living wage. This Comment focuses on actions the courts or legislature can take to address this problem. First, the courts should adopt a totality of circumstances test to determine whether a service charge is discretionary. Second, the courts or legislature should require that service charges unambiguously disclose whether the charges are tips. Third, they should adopt a rebuttable presumption rule, as currently applied in New York. These protections would strengthen the FLSA and bring its effect closer to Congress’ original intent. Most importantly, these actions would provide relief to the nation’s most vulnerable workers.
* J.D. Candidate, The Pennsylvania State University School of Law, 2024.