Mandatory Gratuities Are Not Tips, But May Be Considered Commissions

For tipped employees – one of the groups who have been disproportionately negatively impacted by COVID-19 remedial measure – the law surrounding what is considered a “tip” is critical to their compensation. There is a growing trend for restaurants, cafes, and bars to charge customers mandatory gratuities (usually around 20%), similar to service fees charged in many European countries. The question then becomes whether these mandatory gratuities are considered tips for purposes of calculating minimum wages and overtime.

In December, the Court of Appeals for the Fourth Circuit concluded that the mandatory service charges imposed by a restaurant on dining parties of six or more were not “tips” under the FLSA. The Court reversed and remanded the trial court’s determination that the FLSA’s “commissioned salesperson” overtime exemption applied, as well as the trial court’s determination that the tip pool in question was valid. Tom v. Hospitality Ventures, LLC, 2020 U.S. App. LEXIS 37074 (4th Cir. Nov. 24, 2020). Specifically, the Fourth Circuit held that: (1) the “automatic gratuities” at issue were not “tips” because the customer was not authorized to deviate from the required gratuity amount; (2) the automatic gratuities could possibly qualify as “commissions” under the Section 7(i) “retail sales” exemption; (3) even if the automatic gratuities are deemed commissions, they still must be counted as total compensation in determining whether the employer satisfies Section 7(i)’s requirement that “more than half [of the employee’s] compensation for a representative period (not less than one month) represents commissions;” and (4) an employer violates the tip credit rules by distributing tip pool proceeds to restaurant employees whose customer contact is de minimis (adopting the viewpoint expressed by the Fifth and Sixth Circuits).

While the specifics of the Court’s ruling may be technical, if you are tipped employee whose employer has gone to a mandatory service charge business model, you likely will have questions regarding the legality of that plan. The determination of this question will be on a case-by-case basis, depending on the details of the employer’s plan. Therefore, it is in your interest to contact Shavitz Law Group for a free consultation at (800) 616-4000, or visit us at for a free, no obligation review of your circumstances and your rights.


Gregg Shavitz, Shavitz Law Group, 951 Yamato Rd Ste 285, Boca Raton, FL and 800 3rd Ave, Suite 2800, New York, NY. Lawyers licensed in states including FL, NY, NJ, and TX. The choice of a lawyer is an important decision and should not be based on advertisements alone.

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