Jeff Ruzal Quoted in “11th Circ. Ruling Shows Tension in Service Fee Interpretations”

An Eleventh Circuit ruling that service fees are not tips offers a novel alternative to tipped compensation for waitstaff and is a good reminder for hospitality employers to be mindful of how they charge customers, attorneys said.

In an issue of first impression, a three-judge appellate panel on Friday unanimously upheld a district court's decision that the celebrity restaurateur known as Salt Bae — whose real name is Nusret Gökçe — and his steakhouse Nusret Miami LLC didn't run afoul of the Fair Labor Standards Act when they used an 18% service fee to cover employees' minimum and overtime wages. The decision hinged on the fact that the service fee was a mandatory charge and a patron had no say in whether to pay it. …

What's in a Service Fee

An interesting aspect of the New York state hospitality wage order concerning such fees is that its focus is on administrative fees for banquets or special functions instead of service fees, said Jeffrey Ruzal, a member of management-side firm Epstein Becker Green.

"One might take the position that because this is an automatic charge assessed on every customer who walks into that restaurant, well then because that doesn't constitute an event, or a banquet or special function, but rather a meal, that that carveout language may not even be available," he said.

Still, New York has a severe standard, and employers should be mindful that such fees are presumed tips unless the employer clearly describes otherwise.

A fact from the Eleventh Circuit decision is that there was a blank line for gratuity in addition to the service charge language, which really distinguished the two, Ruzal said.

"What's interesting to me though, is if you took 100 receipts at the end of the night, how many customers are actually going to fill out the gratuity line in addition to the 18% service charge?" he said. "That really would inform what the customers are thinking the charge really is."

Servers as Sales People

What struck Ruzal about the Eleventh Circuit opinion was that the servers at Nusr-Et, the Miami restaurant, were compensated as commissioned salespeople as opposed to tipped workers.

Restaurant servers are more commonly paid a tipped minimum wage. The Fair Labor Standards Act ordinarily lets an employer pay a tipped worker as little as $2.13 per hour as long as tips carry the worker to the standard federal minimum wage, which is $7.25.

Nusr-Et used the 18% service charge to pay servers as commissioned employees under Section 7(i) of the FLSA.

Under that provision, a retail or service commissioned employee can be exempt from overtime if their regular rate of pay is more than one and one-half times the applicable minimum wages and if more than 50% of the worker's earnings come from commissions.

The 18% service charge could be a strong incentive for workers to be good salespeople and get patrons to order more food, because that could ultimately have an impact on the fee, Ruzal said.

"In that regard, it does kind of reflect a commission of sorts because they are selling, they are trying to get the most sale that they can from any particular seat and that's going to directly affect the amount of money they make," he said.

This compensation structure, which provides six-figure pay to some workers at an upscale steakhouse, would not work universally, Ruzal said, but it does provide an interesting alternative to tipped wages.