In Samiento v. World Yacht Inc., a decision that could have wide-spread implications for companies who employ tipped employees, the highest court in New York has ruled that mandatory gratuity payments or service charges attached to patron bills can be considered a “gratuity” under New York Labor Law § 196-d and thus must be paid in full to the employees as wages.
The plaintiffs in Samiento were restaurant servers who worked on three different types of cruises offered by the defendant: (1) banquet cruises, i.e., private celebratory, ceremonial, charitable or corporate events for which individual or corporate patrons charter an entire vessel; (2) general public dining, i.e., cruises attended by members of the general public who purchase individual tickets either from defendants directly or from designated travel and tour operators; and (3) special events cruises, i.e., cruises similar to the general public dining cruises but held on major holidays, such as New Year's Eve, such that they are sold at a significantly higher price.
The defendants paid their employee wait staff an hourly wage. Tips were allowed but seldom collected, allegedly because patrons believe the tip is included in the price of the cruise. For banquet cruises, patrons were told the mandatory 20% service charge is remitted to the wait staff as a gratuity. The plaintiffs also alleged the service charge was treated like a gratuity for sales and/or income tax purposes. With regard to the remaining two types of cruises, patrons were told that a gratuity was included in the price of the ticket. However, the plaintiffs alleged the 20% service charge for banquet cruises was never paid to them, and only a 4-7% gratuity was given to them from the two public dining forms of cruises.
The defendant argued that the service charges, etc. could not be considered a gratuity under the law because they were mandatory, not voluntary, regardless of what patrons were told and how the payments were treated for tax purposes. Both the trial court and Appellate Division agreed and dismissed the complaint at the pleadings stage; however, the New York State Court of Appeals reversed.
The Court of Appeals began by looking to the language of Labor Law § 196-d, which states:
No employer or his agent or an officer or agent of any corporation, or any other person shall demand or accept, directly or indirectly, any part of the gratuities, received by an employee, or retain any part of a gratuity or of any charge purported to be a gratuity for an employee. [Emphasis added].
The Court held this language was clear and unambiguous; by the general meaning of the words, the amounts at issue were “charges,” and by the representations made to the patrons, as well as the tax treatment of those charges, they “purported to be a gratuity.” Moreover, the Court cited the legislative history of the statute, which revealed its purpose was to end the “unfair and deceptive practice” of an employer retaining money paid by a patron “under the impression that he is giving it to the employee, not the employer.” As the Court explained:
Even if the charge is mandatory, and not subject to negotiation, when a complaint asserts, as plaintiffs’ complaint asserts here, that a service charge has been represented to the consumer as compensation to defendants' wait staff in lieu of the gratuity, such allegation is covered within the statutory language of Labor Law § 196-d.
The defendant argued that this so-called plain meaning was contradicted by the last sentence in Labor Law § 196-d, which states:
Nothing in this subdivision shall be construed as affecting … practices in connection with banquets and other special functions where a fixed percentage of the patron’s bill is added for gratuities which are distributed to employees, nor to the sharing of tips by a waiter with a busboy or similar employee.
However, the Court of Appeals rejected that argument. It explained that, according to the legislative history regarding that sentence, it was included only to ensure the industry could continue its common practice of pooling – i.e., applying a fixed percentage or amount to a banquet patron's bill as a gratuity which then was distributed to all personnel engaged in the function. The legislature wanted to make sure an employee who received a tip directly could be required to share it with the rest of the personnel who worked the banquet without alleging a violation of the Labor Law. Thus, the Court found the plaintiffs’ lawsuit should be permitted to proceed with regard to all three forms of cruises.
This case presents a cautionary tale to employers. If you are going to represent to patrons that a payment, even a mandatory one, is a service charge in the nature of a gratuity, you must treat it accordingly. Employers who operate in New York are strongly recommended to review their wage payment policies and procedures to ensure they are in compliance with this requirement.
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