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Legal Updates

SJC Ruling Emphasizes Necessity Of Strict Compliance With Tips Act

The Massachusetts Supreme Judicial Court (“SJC”) recently issued a ruling that serves as a reminder to service industry employers of the importance of providing clear notice to patrons regarding the nature of service charges, as required under the Massachusetts Tips Act (the “Tips Act”).

In Hovagimian v. Concert Blue Hill, LLC, the SJC ruled that in order to take advantage of the Tips Act’s “safe harbor” provision – which allows employers to retain certain non-tip administrative fees – written notice to patrons regarding the nature of the charges must be consistent and unambiguous.

Background: The Massachusetts Tips Act

Under the Tips Act, which was enacted in 2004, service employees in Massachusetts are entitled to tips and certain “service charges” paid by customers. The Tips Act defines a service charge as “a fee charged by an employer to a patron in lieu of a tip to any wait staff employee, service employee, or service bartender, including any fee designated as a service charge, tip, gratuity, or a fee that a patron or other consumer would reasonably expect to be given to a wait staff employee, service employee, or service bartender in lieu of, or in addition to, a tip.”

The Tips Act provides important protections intended to ensure that tipped employees receive all of the proceeds from tips and relevant service charges. As a general rule, only employees who provide service directly to patrons (i.e., “wait staff employees,” “service employees” and “service bartenders” – all as defined under the Tips Act) are entitled to receive tips and participate in tip pools. Further, the Tips Act requires employers to distribute covered service charges to employees in proportion to the services they provided; these service charges cannot be retained by the employer.

However, the Tips Act contains a “safe harbor” provision that permits employers to retain a house or administrative fee imposed on a patron in addition to, or instead of, a service charge or tip. In order to do so, the employer must provide “a designation or written description of that house or administrative fee, which informs the patron that the fee does not represent a tip or service charge for wait staff employees, service employees, or service bartenders.”

If an employer fails to provide such a designation or description to a patron, the funds are considered service charges under the Tips Act and must be distributed to wait staff employees, service employees, and/or service bartenders. Failure to comply with these strict requirements can result in costly penalties for employers, including back pay, mandatory treble damages, attorneys’ fees and litigation costs.

Factual Background

Against this backdrop, the SJC’s recent Blue Hill ruling held that Blue Hill Country Club (“Blue Hill” or the “Club”) violated the Tips Act by listing unspecified charges for “service” on its invoices to patrons and then failing to distribute these service charges to its workers.

Blue Hill followed a three-step process in memorializing its arrangements for catered events. First, the patron would sign a contract, which typically included details of the event: for example, hours, pricing, payment schedule and other relevant information. Blue Hill’s event contracts also included language specifying that the patron would be charged (i) a 10% “gratuity” charge to be distributed entirely to Blue Hill’s wait staff and service employees, and (ii) an additional 10% “administrative” or “overhead” charge to be retained by the Club.

Second, patrons would execute a “Banquet Event Order Invoice” which, among other things, itemized fees into three categories: “charges,” “taxes,” and “service charges and gratuities.” Notably, the 10% administrative charge described in the earlier contract was not similarly identified in the order invoice.

Lastly, after the event had been held, the Club would provide the patron with a second invoice that operated as the final bill and detailed the charges the patron incurred. On this invoice, under a heading labeled “Service & Tax Charges,” three separate categories of charges were listed: “tax,” “gratuity,” and “service.” Significantly, the 10% charge described as an “administrative” or “overhead” charge in the initial contract was instead labeled as a “service” charge in the final bill. The inconsistency regarding the labelling of this “service” charge would become the heart of the dispute in the Blue Hill case.

The Blue Hill Decision

In the Blue Hill litigation, former employees of the Club filed suit, asserting, in part, that the Club had not remitted all “service charges” to its tip-eligible employees, as required by the Tips Act. Blue Hill prevailed at the trial and appellate levels, and the plaintiffs appealed to the SJC.

In a 5-1 decision, the SJC reversed the lower courts’ holding. The SJC held that the language in the initial event contract that specifically referenced the 10% “administrative” or “overhead” charge was inconsistent with how that charge was described on the two subsequent invoices. According to the SJC, while the disclaimer language in the initial contract would have been sufficient for Blue Hill to claim the protections of the safe harbor and retain the funds, Blue Hill forfeited those protections by issuing to patrons the two subsequent invoices that clearly listed the disputed fees as a “service” charge – a term specifically defined in the Tips Act as the type of fee that is required to be distributed to service employees.

Blue Hill argued that because the initial contract properly described the disputed fee as an “administrative” or “overhead” charge, the Court should disregard the designation of that fee as a “service” charge on the subsequent invoices. The SJC was not persuaded, holding that accepting Blue Hill’s argument would require the Court “to disregard the unambiguous language” in the Club’s subsequent invoices to patrons.

Implications For Employers

As the SJC’s decision underscores, service industry employers in Massachusetts seeking to avoid the same fate as Blue Hill must “be conscientious and consistent in [their] drafting” of contracts, invoices, and other documents detailing any fees collected from patrons that an employer intends to retain.

Thus, Massachusetts employers with wait staff or other employees covered by the Tips Act should carefully review their customer contracts, invoices, and related documentation, with the aid of experienced employment counsel. Ambiguity or inconsistency in an employer’s documentation relating to patron fees may expose the employer to significant liability under the Tips Act.

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If you have any questions about how the Blue Hill decision may affect your obligations as an employer, or otherwise need assistance with the Massachusetts Tips Act or any related issues, please feel free to contact us.