In facilities such as large hotels and large restaurants where the employer is in the business of providing a banquet facility at which food and beverages are served, the employer often adds a mandatory, and substantial “service charge” to the contract for every banquet. Prior to 2019 California, courts long held that these mandatory charges cannot be considered gratuities under the labor code and thus not distributable to those who serve food and beverages at the banquet.

That view changed after the 2019 appellate case O’Grady vs. Merchant Exchange Productions Inc., 41 Cal.App.5th 771 (2019) 254 Cal.Rptr.3d 494. Plaintiff, Lauren O’Grady, was a banquet server and bartender at the Julia Morgan Ballroom in San Francisco, which is operated by Merchant Exchange Productions. Plaintiff brought this class action alleging that her and the other non-managerial service employees were entitled to the 21 percent “service charge” added to every banquet bill. Plaintiff alleged that the service charge constituted a gratuity that should be distributed to the non-managerial service employees pursuant to labor code section 351.

The employer took the position that two Court of Appeal opinions hold, as a matter of law that a service charge can never be a gratuity. The trial court agreed, and sustained the employer’s general demurrer without leave to amend. The issue presented on appeal was whether the “service charge” may be a “gratuity” that Labor Code section 351 requires to go only to the non managerial employees involved with the actual serving of the food and beverages.

The court of appeal reversed the trial court dismissal and concluded there is no categorical prohibition why what is called a service charge cannot also meet the statutory definition of a gratuity.

Tipping and service fees have been becoming a flashpoint in the restaurant and hospitality industries. Healthcare-related service fees began gradually popping up on diners’ bills in the last decade but became ubiquitous after the COVID-19 shutdowns. The tacked-on fees came amid a wave of empathy and gratitude for service workers at a moment when the future of restaurants seemed in doubt.

Now, according to a report by the San Francisco Chronicle the O’Grady ruling was tested as recently as April 19, 2023 when a San Francisco judge ruled in a nonjury trial that a Marriott hotel in downtown San Francisco must pay around $9 million in withheld service fees to staff who served food and drinks at banquets, and said he would decide later whether to add interest charges and attorneys’fees. .

The workers’ lawyer, Shannon Liss-Riordan, said this was the first case to go to trial since the O’Grady decision where she was also the plaintiff’s attorney. “Customers pay service charges – on top of hefty food and beverage bills – because they think they are tips for the waitresses.” Liss-Riordan said she has won similar cases in Massachusetts and Hawaii and has suits pending against other hotels in San Francisco and elsewhere in California..

Harvard Law School graduate Shannon Liss-Riordan of Lichten & Liss-Riordan has had a long career litigating discrimination, wage and hour, and traditional labor law matters, and has gone after some of the nation’s most prominent companies, including Whole Foods, Starbucks, Uber and Lyft, on behalf of workers.

And now according to a new story published this month in the Los Angeles Times, the Los Angeles city attorney is examining whether Ten Five Hospitality violated an ordinance for allegedly keeping the entirety of the 5% service fee they charged to customers instead of distributing it to workers,

A 5% service fee attached to customer restaurant bills is at the heart of this investigation launched by the Los Angeles city attorney’s office, and it involves some of the city’s most celebrated restaurants at the adjacent Thompson hotel, Tommie hotel and Citizen News building: Mother Wolf, Ka’teen, Mes Amis, Bar Lis and the Terrace.

The definition of “hotel” in the L.A. ordinance covers restaurants that are contracted or leased premises that are connected to or operated in hotels, such as the Terrace or Mother Wolf. L.A.’s ordinance states that service fees cannot be retained by a hotel employer but must be paid in their entirety to the hotel worker performing services for the customers from whom the service charges are collected. The ordinance also mandates that no part of these amounts may be paid to supervisory or managerial employees, and that the service fee must be paid to the hotel workers equitably.

According to an April 6 letter from Deputy City Atty. Joshua L. Crowell, City officials asked Ten Five Hospitality – the group that operated the five restaurants –  and the five restaurants, for a response and numerous documents, including any evidence that would demonstrate workers benefited from the fee.

The city attorney’s office is also investigating allegations that at least two workers at the Terrace were fired after speaking out about the service fee.

No Ten Five Hospitality executives were made available for comment.  But a spokesperson provided a prepared statement, which read: “The Wellness Fee, which is explained clearly on all customer bills, enables the company to provide an above-market employee package including a robust medical, dental & vision insurance program, 401(k) benefit offering and better working conditions for all employees.” The spokesperson declined to answer any other questions about the allegations in the city’s letter.