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Revived suit seeks to pay gratuities to workers at hotels, clubs and banquet rooms
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Courtesy: Bob Egelko | News Source:

Hotels, country clubs and banquet rooms commonly add a “service charge” to their food and beverage bills, like the 21% charge levied by the Julia Morgan Ballroom in San Francisco. To customers, it looks like a tip — or “gratuity,” in legal terms — that will go to the food servers.

That’s not the case in California, where management usually keeps the service charge for itself or shares some of it with selected employees. But that practice may change soon, in light of a ruling by a state appeals court in San Francisco.

The evidence in this case suggests that “the service charge is plainly perceived by the customer to be a gratuity, and is intended by the customer to be a gratuity,” said the First District Court of Appeal. “An equally fair inference is that the customer would not intend a gratuity to be pocketed by defendant,” the Julia Morgan Ballroom’s owner and operator.

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The ruling, issued Oct. 31, stopped short of ordering the owner to distribute future service charges to the ballroom’s servers. But it took a substantial step in that direction by saying that such charges can fit the legal definition of a gratuity.

“The ruling leaves little doubt: Services charges are gratuities,” declared Shannon Liss-Riordan, lawyer in the suit against the ballroom’s owner, Merchant Exchange Productions. She said courts in New York and Hawaii had reached the same conclusion after years of litigation.

“These are charges that customers are willing to pay because they look to them like gratuities to staff,” Liss-Riordan said. “But then employers pocket all or some of the money. It’s deceptive to customers, and it hurts workers.”

One of those workers is Lauren O’Grady, a former banquet server and bartender at the Julia Morgan Ballroom who sued the owner on behalf of past and present employees.

“I have worked in the hospitality industry for a long time. Service workers depend on their tips to make ends meet,” she said in a statement.

“For too long in California, employers have gotten away with charging customers a ‘service charge’ that everyone understands is being paid in place of a tip” even though it’s not treated as one, O’Grady said. “I’m very excited that the appeals court has recognized that service workers may keep these charges.”

Merchant Exchange could seek review in the state Supreme Court. If the ruling stands, it will be binding on trial courts statewide. The appeals court said it published the ruling as a precedent at the request of the state’s labor commissioner, Lilia García-Brower, who described it as a subject of “significant importance to service workers.”

The company’s lawyer declined to comment.

California protects servers’ rights to tips more strongly than other states. Federal law, and the laws of most states, allow employers to deduct tips from employees’ wages, which can drop to as little as $2.13 an hour. Tips make up the rest of their minimum wage — $7.25 an hour under federal law, higher in about half the states.

California law allows no such deductions and requires a minimum wage of $12 an hour, due to rise to $15 by 2022. Minimum wage in San Francisco is $15.59 an hour.

According to O’Grady’s lawsuit, the hospitality industry in California typically adds a service charge of between 18% and 22% to food and beverage bills. At banquets in the Julia Morgan Ballroom, the owner keeps part of the 21% charge for itself and distributes the rest to managers and other non-servers, the suit said.

A San Francisco Superior Court judge dismissed the suit, citing past rulings by other appeals courts, including a Los Angeles court’s decision in 2010 that declared, “A service charge by definition is not a gratuity.”

But in last week’s ruling reinstating the suit, the appellate panel said the past decisions were issued in different contexts — the Los Angeles court upheld a city ordinance that required hotels to forward all room service charges to their employees — and the words should be defined as they are generally understood by the customers.

Neither the previous courts nor state lawmakers would be likely to conclude that “an employer should have the unfettered freedom of definition if it might result in depriving employees of sums that otherwise might qualify as gratuities,” Justice James Richman said in the 3-0 ruling.

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