As Bay Area cities adopt revised minimum wage ordinances, restaurant owners are working to come up with innovative ways to both meet these increasing payroll requirements and, in many cases, provide for more equitable compensation between Back Of House (cooks and dishwashers) and Front Of House (servers) employees. Many owners are considering adding a service charge to the customer’s bill that they can then distribute among all of the workers, rather than the traditional model of customers leaving tips that are only or primarily given to servers. However, provisions in the minimum wage ordinances for some cities place restrictions on this option. Berkeley and Oakland are two of the largest cities to pass ordinances restricting employers’ use of service charges.
Minimum Wage Ordinances
With the passage of Measure FF, Oakland set the city’s minimum wage at $12.25 per hour, effective March 2, 2015. This rate increases on January 1 of each year by an amount corresponding to the prior year’s increase, if any, in the Consumer Price Index (“CPI”) for urban wage earners and clerical workers for the San Francisco-Oakland-San Jose metropolitan statistical area. The current Oakland minimum wage is updated here (as of January 1, 2017, Oakland’s minimum wage is $12.86 per hour).
Similarly, on August 16, 2016, the Berkeley City Council adopted a revised Minimum Wage Ordinance, No. 7,505-N.S., B.M.C. Chapter 13.99, which took effect on October 1, 2016. This ordinance raised the minimum wage in Berkeley to $12.53 effective October 1, 2016; $13.75 effective October 1, 2017; and $15.00 effective October 1, 2018. After 2018, the minimum wage will increase annually based on the annual increase in the CPI. Employers should note that they are required to post a notice of the minimum wage rates where employees can easily read it, and sample notices are available here for Berkeley and here for Oakland.
Service Charge Provisions
An important change in both the Oakland and Berkeley minimum wage ordinances was the introduction of sections regarding “Hospitality Service Charges” (Section 13.99.050 in Berkeley’s ordinance and Section 5.92.040 in Oakland’s ordinance). These provisions regulate service charges, which are defined as separately-designated amounts collected from customers that are for service by employees, or are described in such a way that customers might reasonably believe that the amounts are for those services or in lieu of tips.
Berkeley and Oakland use different language to describe how service charges may be used, but the end result is the same: the money must be paid to the employees providing the service for which there is a charge applied, and the service charge cannot be retained by the employer. Oakland’s ordinance requires service charges to be “paid over in their entirety to the Hospitality Worker(s) performing the services for the customers,” and Berkeley’s ordinance states that services charges “shall be used by the Employer to directly benefit the Employees.”
Prior to the passage of these ordinances, there was no language related to service charges in the Berkeley or Oakland ordinances (or in any local laws except a minor law related to hotel workers in the LA area), so restaurants collecting service charges were free to collect and distribute this money in any way they chose.
Implementation
Both Oakland’s and Berkeley’s ordinances require restaurants to document how and why service charges are distributed to employees, and through such documentation these charges may be used to compensate both FOH and BOH employees. Specifically, Berkeley’s ordinance requires the employer to “define the chain of service and associated job duties entitled to a portion of the distributed service charges and notify the employees of the distribution formula as well as provide in writing to each employee its plan of distribution of service charges to employees.”
Thus, a restaurant could define “service” as starting with the host who seats the guest, then to the server who takes the order, then the bartender who makes the drinks, the cooks who cook the food, the runners who run the food, the bussers who clear the plates, and the dishwasher who makes sure that the dishes are clean. Berkeley’s ordinance does not exclude supervisors from being able to receive a portion of the service charge, but Oakland’s ordinance does not permit service charges to be distributed to supervisors for work they do in supervisory positions.
While neither ordinance gives any further information about implementing this requirement, the Oakland City Attorney provided the following guidance regarding what should be included in the written policy that is distributed to employees, which complies with the Oakland measure and also appears to fulfill the requirements of the Berkeley ordinance:
- A complete definition of “service,” including a reasonable and thorough description of why and for what the employer is charging the service charge;
- Each employee position that is included in the chain of service;
- The percentage that each employee shall receive from the service charge, which shall be equitably based on their contribution in the chain of service;
- Written notice that supervisors shall not receive a portion of the service charge unless they perform nonsupervisory work in the chain of service (Oakland only);
- A statement that the service charges will be paid to employees no later than the next payroll following the work or collection of the service charge from the customer, whichever is later (Oakland only); and
- Written notice, including the identity of an individual or employment position, to whom employees may direct questions or complaints regarding the payment (or nonpayment) of services charges.
Additionally, employers should provide adequate, written notice to its customers of, at a minimum, the amount of the service charge, what the service charge is for, and who shares in the service charge. At least 15 days’ written notice should be given to employees if the policy changes.
Conclusion
With the passage of these ordinances, restaurant owners may use service charges to collect a specific amount for service on each guest check and then distribute these amounts among FOH and BOH employees, but such charges will not help the owners meet minimum wages requirements. Under state law (and different than many states), neither tips or service charges can count towards the employer’s minimum wage obligations. Therefore, owners may need to find other creative solutions to meet rising minimum wage obligations at a time when food, rent, and other costs are also rising.
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