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Service charges

If an employer does add a “service charge” to the receipt of a tipped employee’s guest, is the employer legally allowed to take 3% to pay the people who take the reservation? If so, does the employer now have to pay the employee a higher rate?

A restaurant employer is legally entitled to keep all of the service charge, if he wants to. Many customers assume that the service charge goes directly to the employee, but this need not be true. It is not unusual for restaurants or caterers to keep 50% or more of the service charge, so we think 3% is very modest.

The requirements for employee pay are unchanged…the employee is entitled to make at least $6.55 per hour, on average, for time worked. If the employee does not make this amount, the employer must pay the difference as cash wages.

Under the law, when an employee keeps any potion of the service fee (even 1%), the employer must pay taxes on the entire 25% amount, as business revenue. So keeping a small portion of the service fee is not necessarily a smart business move, but it is legal.

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This entry was posted on Monday, November 10th, 2008 at 11:49 am and is filed under
Compensation, Human Resources Management.
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