The FLSA makes a sharp distinction between "service charges" and "tips," and the difference matters. Let's break down what it means for employers, employees, and customers:
1. Not Tips: The Department of Labor (DOL) says a tip is a voluntary payment. A service charge—like that 20% added automatically—isn't voluntary, so it doesn't count as a tip under the FLSA.
2. Service Charge ≠ Employee Pay: Employers don't have to share service charges with employees. Restaurants can keep the full amount, which may leave employees—and even customers—assuming the money goes to staff when it doesn't.
3. If Shared, It's Wages: If an employer gives part of the service charge to employees, it's treated as wages, not tips. This impacts overtime calculations and cannot count toward the employer's tip credit.
4. No Tip Pools: Service charges aren't tips, so they can't go into tip pools. Only tips freely left by customers—like that $20 on the table—can be pooled for distribution.
5. Transparency Matters: Restaurants should clearly tell employees when service charges, not tips, are used for pay. They also need to be upfront with customers, who might assume the fee benefits staff when it doesn't.
The takeaway: Restaurants have flexibility with service charges, but transparency is key to maintaining trust with both employees and customers. So next time you see a service charge on your bill, ask, "Who's really getting this money?"