HOUSTON — The lack of transparency in where service charges in a customer’s bill actually go is leading to expensive legal troubles for hospitality operators.
The core issue in legal disputes over service charges is whether a reasonable customer understands what that mandatory fee actually means, said Amanda Monroe, partner and labor and employment practice group leader at Michelman Robinson, in a presentation at the Hospitality Law Conference.
“Did they believe a fee that’s maintained by the hotel or the restaurant is not going to employees, or do they understand it to be a gratuity or some combination of the two?” she asked.
There’s been a large focus on fee transparency in recent years, she said. New rules have gone into effect over junk fees and drip pricing, so all types of fees are now under the microscope.
"What's important now is looking at the increased scrutiny on these service charges," she said. "Whether it's from a very active plaintiff's bar, like we have in California and other states, or whether it's legislative scrutiny, there's a large focus on transparency."
It’s necessary to know whether any portion of a service charge is gratuity because of laws that prohibit an employer from taking any of those funds, diverting those funds or holding on to them because they are considered wages of the employees, she said. Violating those laws can lead to wage and hour class action claims.
It may also cause confusion on the side of the customer who may misunderstand whether they should provide a tip to service employees on their own, she added.
Having a service charge is a practical tool for operators, Monroe said. It helps to standardize revenue streams and labor costs, reducing discretionary tipping models which helps recruit more talent as there’s predictable gratuity.
“It's an important tool. It's not going anywhere,” she said. “And by no means would I suggest that you should stop utilizing this tool. It's frankly necessary for operating. What's important now is looking at the increased scrutiny on these service charges.”
Fee clarity
Monroe said the question being litigated in these cases is: What does the customer believe they are paying for? The intent of the operator is irrelevant to the analysis.
Gratuities and tips are considered property of the employees as they are part of their wages, she said. If a reasonable consumer understands that some portion of the service charge is a gratuity, but the employer doesn’t have 100% of that service charge going to the employees, that’s going to expose them to legal risks.
Wage and hour claims and violations related to service charges have hefty financial components, she said. There are back wages, penalties and attorney’s fees. There’s a long look-back period in terms of statute of limitations.
“We're seeing these cases settle currently for some of the really large hotel brands that you would all be familiar with, they're in the mid-seven-figure range,” she said. “So, these are pretty substantial, multimillion dollar settlement over this specific issue.”
When thinking about the life cycle of an event at a hotel, it starts with the proposal from the sales team, Monroe said. The team will have its own documents, email communication that is likely less formal than the documents, telephone calls, banquet event orders, event contracts, menus at the actual event, and then the final invoices and receipts. There may also be some post-event communications as well.
“Each one of these is an opportunity for it to go awry,” she said.
Many operators have service charges split out to be more transparent, but other teams and communications may be outdated, she said.
“Throughout this lifecycle of the transactions, the documents are either inconsistent or missing language,” she said. “Plaintiff’s attorneys are looking at that full picture. They’re looking for that one or two documents in that lifecycle of the transaction that are either unclear, inconsistent or just missing the language, and that’s what they’ll point to.”
Steps to take
The solution to this issue has been moving away from using the term “service charge” all together, Monroe said. Instead, operators are using new language to separate gratuities to be paid to employees and administrative fees going to the operator.
“We just make it as clear as possible so that there is no question as to who is receiving what portion,” she said. “If you break it down versus having a lump sum, it helps you avoid liability a little bit better.”
When rolling out these new practices, there are some things to be mindful of. Consistency is key, so don’t let managers use their own templates, she said. Even with new standardized templates, they might not always trickle down to the sales teams who are the ones setting and entering into the contracts.
“That's where the training focus really should be taught not to use their languages in these contracts,” she said. “If you have somebody that’s your best salesperson, they have the paper templates they like, they really need to switch gears and use the updated templates.”
Another point is to avoid using client’s contracts, Monroe said. It may be difficult for some sales employees, especially if they have a big-name client who offers their version of the contract. The sales teams need to push back on that or at least put up a red flag to update the service charge language. Emails should have disclosures as well.
Training remains key, as it comes down to the employees to implement it, she said. Policy only goes so far.
Oftentimes there are system constraints, but in her experience, vendors have been willing to work with them to figure out how to split out the line items and getting everything on the receipts, she said.
In the end, it’s consistency that matters, Monroe said. Operators will want to introduce these changes into all of their documents, and that can be a big undertaking as it requires going through everything and then making sure everyone has removed the old versions and knows to use the new ones.
“But at the end of the day, that sort of upfront work is worth it, as compared to getting a multimillion-dollar class action lawsuit that we see in California so often,” she said.