Legal Alert: New York's Highest Court Addresses Mandatory Service Charges


According to New York state?s highest court, under the state?s wage and hour law, an employer cannot withhold from its employees any portion of a mandatory service charge that is added to a customer?s bill unless the employer makes it clear to the customer that it is retaining some or all of the charge. See Samiento v. World Yacht, Inc. et al., No. 17 (N.Y. Ct. App. Feb. 14, 2008). It has been a longstanding practice in the hospitality industry for some employers to impose a service charge on their customers in connection with private parties, banquets, special events and other similar circumstances. A number of lower state courts have held that such charges, where mandatory, are not gratuities that must be distributed to employees; instead, the employer may retain all or part of the service charge. However, overruling these decisions, the Court of Appeals held that under New York law, service charges are considered gratuities and must be distributed to employees unless customers are notified otherwise. The issue arose when employees working banquets on a New York-based cruise ship sued their employer because the employer retained most or all of the mandatory service charge it added to its ticket prices. The employees also asserted that the employer told inquiring patrons that the service charge was a gratuity, which discouraged them from leaving tips for the service staff.

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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