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Legislative Memo

518.465.7511
www.bcnys.org

BILL:

S.3109-A (Martins) / A.2179-B (Goldfeder)

Support

SUBJECT:

Notice to customers regarding service charges and administrative fees that are not distributed to employees as gratuities

 

DATE:

May 22, 2013

 

The Business Council of New York State, Inc. supports S.3109-A (Martins) / A.2179-B (Goldfeder) that seeks to clarify the difference between service charges and gratuities that some dining facilities, such as catering and banquet halls, charge to customers. The hospitality industry makes significant economic contributions and is one of the largest employers in New York State. A recent court decision that conflicts with a Department of Labor opinion regarding service charges has made the industry very vulnerable to lawsuits.

Provisions in this bill seek to add clarity to the handling of service charges that are sometimes added to dining bills. Many event and dining facilities have long included a service charge in customer bills that are then used to cover expenses related to organizing an event or large dinner party, such as back of the house employee wages and event planning services. In 2008, the NYS Court of Appeals ruled that "a reasonable patron" standard applied to determining whether service charges should be distributed as gratuities to wait staff (Samiento v. World Yacht).  This ruling conflicted with a Department of Labor opinion that a service charge is not considered a gratuity and is therefore considered to be part of the gross receipts of the employer and which they must pay income taxes on.

Following the World Yacht decision, many business owners who had been following the DOL's ruling on service charges became vulnerable to lawsuits. Many have settled instead of waging an expensive court battle and this has forced many establishments to raise prices, lay off employees or even close.

This legislation does not prevent lawsuits but does provide employers an affirmative defense for those that followed the guidance of the Department of Labor prior to the World Yacht case and prior to the clarifying language of the wage order in 2011. An employer must prove all of these conditions have been met for an affirmative defense: the employer did not knowingly misrepresent a service charge to a customer; the employer charged sales tax on the service charge; the employer included the charge as part of its gross receipts; and the employer paid their food service workers wages in accordance with labor law. Allowing for this affirmative defense will protect businesses that were following DOL guidance but will also allow employees who were victims to seek relief for lost wages.

For these reasons The Business Council of New York State, Inc. supports this legislation and urges immediate enactment.