Legality of Surcharges to Offset Rising Wages

St. Regis Bali breakfast

In-Suite Breakfast Experience – St. Regis Bali, photo by Matt@PEK, CC 2.0

With the passage of both local and state minimum wage increases, the hospitality industry has looked at surcharges to off-set the costs of a labor force, which has traditionally looked to tips for much of their actual compensation. The state minimum wage is to incrementally increase to $15 per hour by 2022.  Some localities, particularly San Francisco, exceed this amount.

California does not allow for tips to be credited against the minimum wage.  This means that businesses are unable to offset their costs with a raise in tips.

Many restaurants and similar businesses have resorted to a wage “surcharge” to address the changes to minimum wage.  These surcharges can range from small percentages of the bill to amounts which are the same as customary tips.  Such surcharges can be beneficial to the businesses by providing extra revenue without increasing prices, cutting costs, or altering other business practices whatsoever.  Proponents of the surcharge also argue that it allows a business to maintain better pay equality between their front of the house and back of the house employees.

At first glance, such a surcharge appears to be an appropriate way for businesses to recuperate the costs of a heightened minimum wage directly from consumers.  In 1989, the California Division of Labor Standard Enforcement proclaimed that any money received as a result of a business’s mandatory service charge is solely the property of the business and not the service staff.  This decision means that Section 351 of the Labor Code, discussed previously in this series, does not apply to a business’s mandatory service charge.

Creating such a surcharge may prove even more enticing for businesses coping with the minimum wage because its employees may take gratuities in addition to a mandatory service charge.  In the Searle v. Wynham International, Inc. case of 2002, a California court of appeals rendered a decision which created strong precedent to allow such circumstances.  In the case, a hotel chain was sued by a customer.  The customer argued that the hotel was engaging in unfair competition by allowing employees to accept gratuities while simultaneously including a 17% mandatory service fee.  He argued that such a practice would lead to service employees receiving an excess in gratuities.  The Court decided such practices could not be a violation of Section 351, which is designed to protect service employees’ rights to the gratuities they earned.  Addressing the unfair portion of the customer’s complaint, the Court found that the policy was proper because it was clearly explained to the customer.  The Court found the hotel’s policy of giving the service charge and any additional gratuities to the employees to be significant in ruling that there was no unfair business practice.

 

The Court expressly stated “(t)he hotel has no obligation to advise consumers about what it does with the revenue it receives from them.”  This meant the hotel could include the charges without explaining whether the money would be given to the staff or not.  This case, combined with the Division of Labor memo, may lead businesses to believe that they may charge any surcharge they like without telling the customer where the money would go (a business cannot give a customer false information in adding such a surcharge, however).  There are numerous opponents who could threaten the status quo of the law.

San Diego’s City Attorney Mara Elliott recently questioned the legality of an unadvertised surcharge to cope with an increasing minimum wage, however.  She argues the surcharges may be a violation under the California Business and Professions Code for false advertising.  Some customers have claimed fraud due to a lack of notice.  It is also unclear whether the surcharges may violate a California Business and Professions Code § prohibits overcharges, which it defines as “. . . the amount by which the charge for a commodity exceeds a price that is advertised, posted, marked, displayed, or quoted to that consumer for that commodity at the time of sale.”

It is unclear whether a surcharge can be implemented that is entirely free of litigation risk.  However key factors in moving a surcharge into a legal safe harbor will be to ensure that customers know about the surcharges before they order their food and beverages.   Additionally, while the surcharges cannot be described as government-mandated, they can be described as a response to a government-mandated wage increase.

Some businesses have attempted to avoid the risk of litigation by being as transparent as possible to the customer.  This has been accomplished including notes at the bottom of the bill such as “A 6.5 percent surcharge has been added to help offset the cost of the California Minimum Wage. This is not for services provided and is not paid directly to service staff.”  Others have placed signs to the same effect at the front of the establishment.

Businesses should now balance the revenue which could be created by a surcharge against the potential costs of litigation.

About William Adams

Attorney at Norton, Moore, & Adams, LLP.
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