Minami Tamaki’s Consumer and Employee Rights Group regularly litigates workplace issues in the food and beverage industry.  A California appellate court’s decision in O’Grady v. Merchant Exchange Productions, Inc. has the potential to significantly expand requirements that banquet charges paid by patrons be provided solely to servers as a gratuity.  In O’Grady, the court held that mandatory service charges added by banquet facilities to their contracts may need to be paid to service employees as a form of gratuity.

Plaintiff Lauren O’Grady worked as a banquet server and bartender at the Julia Morgan Ballroom in San Francisco.  The Plaintiff alleged that the employer imposed a 21 percent “service charge” on banquet contracts.  The Defendant employer retained a portion of the service charge, and allegedly distributed the balance to managers and non-service employees.  None of the service charge was paid to servers. 

The Plaintiff argued that the Defendant’s service charge system violated California legal requirements, including California Labor Code § 351, which provides that tips and gratuities left by customers for service employees are solely the property of the employees.

The Defendant filed a demurrer to the complaint arguing that the Plaintiff’s legal claims could not be pursued, and relying heavily on two cases:  Searle v. Wyndham International, Inc. and Garcia v. Four Points Sheraton LAX. These cases have frequently been cited by hospitality employers to defend their service charge practices. The trial court sustained the demurrer on grounds that the service charge did not constitute a gratuity and that the employer’s retention of those monies did not violate Labor Code § 351. 

The court of appeal reversed, holding that the trial court erred in ruling that a service charge is not a gratuity as a matter of a law.  The appellate court held that there is no blanket prohibition on a service charge being considered a gratuity that is the sole property of employees providing the service. 

The court accepted the Plaintiff’s allegation that patrons intended the service charge to go to servers. The court distinguished Searle and Garcia on grounds that neither involved allegations that the employer retained a service charge that a patron reasonably believed would be paid to the service employees.

O’Grady changes what some considered to be a settled area of law (except where employers were already regulated by a contrary local ordinance).  The decision may require employers to immediately adjust service charge systems and pay practices in order to ensure compliance.  

For more information on California requirements regarding employee gratuities, you may contact Minami Tamaki at (415) 788-9000 or through our online form.