Good News for Maine's Hospitality Industry – A Mandatory Service Charge is Not a Tip!

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[authors: Jim Erwin and Joanne Pearson]

The Maine Law Court has held in the much anticipated Hayden-Tidd v. The Cliff House & Motels, Inc. decision that a service charge imposed on customers in the banquet setting is not a tip under Maine law. The ruling may seem obvious, but the Cliff House is one of a number of class actions brought against Maine's hospitality employers alleging that a 2007 amendment to Maine’s tipping laws (which is no longer in effect) required employers to pay mandatory service charges to service employees only or be liable for minimum wage violations and unpaid wage claims. This case makes clear that under any version of Maine law a mandatory service charge is not a tip and thus the employer has the discretion as to how to distribute it.

As is common in the industry, the Cliff House imposed a mandatory service charge on banquet customers. It was the practice of the Cliff House to pool the service charges collected from different banquets in the same week and distribute a portion to all the servers working at banquets during the week (based on the number of hours worked by each server during that week). The servers were also paid $3.75 per hour for each hour worked at a banquet. The remainder of the service charge was allocated to non-servers working banquet events, such as the dining room manager, director of sales and kitchen employees.

The Plaintiff brought a class action asserting that the banquet service charge imposed by the Cliff House was really a "tip" that could not be shared with non-servers. The Plaintiff's case hinged on a 2007 amendment to Maine law stating that "(t)ips that are automatically included in the customer's bill or that are charged to a credit card must be given to the service employee." Plaintiff argued that sharing the service charge with non-servers resulted in a minimum wage violation obligating the Cliff House to pay each employee an additional $3.75 per hour, even though the servers earned on average three to four times the minimum wage for their work in the banquets.

Noting that the version of Maine law at issue in the case did not define the term "tip," the Court looked to the legislative history regarding the 2007 amendment to divine its meaning. The Court noted that the purpose of the 2007 change was to ensure that employers did not retain tips left by individual customers for services, whether or not the tips were included automatically in the bill or as a credit card charge. It was not meant to apply to mandatory services imposed on customers in the banquet setting. The fact that a service charge was automatically included in the customer's bill did not magically turn it into a "tip" under the statute.

In reaching its decision, it is noteworthy that the Court did not rely on changes to Maine's tipping laws that came into effect on September 28, 2011, after the time period covered by the lawsuit. In 2011, the Maine legislature removed the ambiguous language added in 2007. A definition of "tip" was also added, making clear that a “tip” did not include a “service charge added to a customer’s bill in a banquet or private club setting by agreement between the customer and the employer.” It was also made clear that a service charge is the property of the employer and may be used by the employer to meet its minimum wage and overtime obligation. Finally, the law imposed a new notice requirement on employers, requiring them to notify customers that the service charge does not represent a tip for service employees.

Bottom Line: This decision brings some much needed peace to the hospitality industry. The 2011 amendments were certainly helpful, but with a potential six year limitations period under Maine law for wage violations, there was still uncertainty as to how to treat service charges imposed by employers. However, employers should still remain cautious because non-compliance with tip credit and tip pooling laws can have serious financial consequences, including claims for failure to pay minimum wage and/or improperly withheld employee tips. Pierce Atwood assisted the Maine Innkeepers Association in obtaining the 2011 amendments. If you have any question about tips, tip pooling, the tip credit, or other wage and hour issues, please contact us.