Illegal Service and Delivery Charges

When is a delivery charge illegal?  When is a service charge illegal?

Both New York State law and federal law strictly limit an employer’s ability to retain a mandatory charge, like a delivery charge or service charge, that is a gratuity and belongs to the employees.

Under the New York Labor Law, no employer is permitted to retain any part of a “gratuity or of any charge purported to be a gratuity for an employee.” NYLL § 196-d.  This includes “mandatory charges when it is shown that employers represented or allowed their customers to believe that the charges were in fact gratuities for their employers.”  Samiento v. World Yacht Inc., 10 N.Y.3d 70, 79, 81 (2008).  The ultimate issue is therefore not what the employer intended when they used terms such as “delivery charge,” “service charge,” or “service fee,” but the meaning their customers attributed to them under the reasonable customer standard.   That is, would the “reasonable customer” believe these charges to be a gratuity that the employees – not the employer – are keeping?

The New York Department of Labor and courts interpreting this issue have provided guidance as to when these mandatory charges constitute gratuities under the New York Labor Law:

-When the employer fails to state the delivery charge, service charge or service fee is not a gratuity

-When the employer fails to explain the purpose of the delivery charge, service charge or service fee

-When the employer denotes the charge using a confusing label.  For example, “service charge” is confusing.

-Whether the customer’s bill includes a separate line for gratuity

-While tips are allowed, they are seldom collected

-The mandatory fee or charge is separated on the bill from other charges thereby treating it like a gratuity for sales tax purposes and for income tax purposes as well

-If there are other charges on the bill (e.g., fuel surcharge) that would suggest to the customer the delivery charge is a gratuity because the company is separately charging for delivery-related costs

If a service charge, delivery charge, service fee or something similar is ultimately held to be a “gratuity” and the employer retained any portion of that mandatory charge/fee, the employer will be liable to its employees for the unlawfully retained gratuities and may also be liable for liquidated damages (i.e., penalties for violating the law), attorneys’ fees and costs.

There are also consequences under federal law for the employer unlawfully retaining gratuities.  As a general matter, if an employee is entitled to overtime, the employer calculates the overtime by multiplying the employee’s regular rate of pay by one and one-half (1.5).  So, if an employee’s regular rate of pay is $10.00, their overtime rate is $15.00 ($10.00 x 1.5).  This is proper and legal.  But if an employer unlawfully retains an employee’s gratuity, that amount is considered wages under federal law and must be included in the employee’s regular rate when determining their overtime rate.  Continuing with the example above, if an employer unlawfully retained a mandatory $5.00 service charge that belongs to that employee as a “gratuity,” that employee’s regular rate needs to be $15.00 for purposes of calculating overtime.  So that employee’s correct overtime rate is $22.50, and the employer is liable to the employee for $7.50 ($22.50 – $7.50).

Please contact Douglas Lipsky with any questions.