Restaurants are increasingly adding service fees to customers’ bills. However, service fees are not synonymous with tips, and employers must follow Department of Labor (DOL) regulations for distributing tips.
Service Fees vs. Tips
There may be instances where restaurants want to add a service fee to a guest’s check at the point of sale. Examples include:
- Upsell fees for special menus
- Banquet event fees
- Takeout or delivery fees
- Bottle service or corkage charges
Service fees are charges required of customers that go to the restaurant; tipping is considered a discretionary amount that goes directly to restaurant staff. Examples of when a tip may be added to a guest’s check include:
- Automatic gratuity for a large dining party
Regulations Regarding Tips
While customers aren’t always comfortable with being pressured to tip, many restaurants nonetheless choose to automatically prompt a tip when a customer pays at a point-of-sale machine. Businesses need to remember that these tips are part of an employee’s compensation and are required to be distributed within the payroll period with taxes withheld.
As we’ve covered before, if it’s considered a tip, it belongs to the employee, not the employer. Management does not have the option of withholding any portion of a tip as a service fee to cover the restaurant’s overhead or administrative expenses. In addition, only employees may participate in tip pooling; the employer cannot be part of a tip pool.
As long as managers and supervisors don’t keep any portion of tips for themselves, the DOL gives them the discretion to:
- Pool tips across multiple locations as long as all tips are fully distributed.
- Decide to distribute tips evenly or according to hours/number of days each eligible employee works.
- Apply conditions for worker tip pool eligibility. For example, an employee who does not work all scheduled shifts may be declared ineligible for tip pooling that week.
- Possibly allow administrative employees to participate in a tip pool if they spend a significant amount of their workday taking orders for individual restaurant locations or catering orders. However, in most cases hourly administrative staff and corporate office employees are excluded from tip pooling.
Restaurant managers may wish to review the DOL’s fact sheet, and MarathonHR is happy to share our best practices for compliance with tipping regulations.