Understanding the difference between service charges and tips is critical for New York restaurant owners to remain compliant with state and federal labor laws. Misclassifying these charges can lead to legal disputes, penalties, and claims from employees. This guide will help restaurant owners navigate the legal landscape surrounding service charges and gratuities.

What is a Tip?

A tip (or gratuity) is a voluntary payment made by a customer directly to an employee for service provided. Under New York law:

• Tips belong entirely to the employee.
• Employers cannot retain any portion of a tip or use it to offset wages (except when applying a tip credit where legally allowed).
• Tips are not considered part of the restaurant’s revenue and must be distributed in full to employees.
  
  

What is a Service Charge?

A service charge is a mandatory fee added to a customer’s bill, often used to cover administrative costs, banquet services, or event staffing. Unlike tips, service charges:

• Belong to the restaurant, not the employees (unless distributed voluntarily).
• Must be clearly disclosed on the menu or receipt to avoid customer confusion.
• May be subject to sales tax since they are part of the restaurant’s revenue.
  
  

Key Legal Differences Between Tips and Service Charges

Employer Responsibilities When Implementing Service Charges

If a restaurant chooses to implement a service charge, compliance with New York State Department of Labor (NYSDOL) rules is essential:

1. Clearly disclose service charges on menus and receipts.
2. Avoid misleading customers—if a charge is not a tip, the bill must clarify that employees do not receive it.
3. Determine whether to distribute part or all of the service charge to employees.
   • If shared with employees, it may be considered compensation, and wage and tax laws will apply.
   • If retained by the restaurant, it cannot be counted as gratuity.
     
     

Common Compliance Pitfalls

• Failing to clarify service charges: If a bill includes a service charge but does not specify its purpose, customers may assume it is a gratuity, leading to potential claims.
• Misclassifying service charges as tips: Restaurants that keep mandatory charges but still apply tip credit may face wage theft claims.
• Unlawfully retaining tips: Employers cannot deduct administrative costs from employee tips or pool tips with non-tipped staff.
  
  

Best Practices for Compliance

1. Use clear and conspicuous language on all menus and receipts about how service charges are handled.
2. Separate service charges from gratuities in financial records and payroll.
3. Consult with an employment attorney to ensure wage practices comply with NYDOL regulations.
4. Regularly review policies to remain up to date with changes in labor laws.
   
   

Conclusion

Navigating the legal distinctions between service charges and tips is crucial for New York restaurant owners. Missteps can lead to costly litigation, reputational harm, and regulatory penalties. By ensuring clear policies and transparency, restaurant owners can stay compliant and maintain fair labor practices for their employees.