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New York restaurants, venues, and event promoters are increasingly adding mandatory “service fees” instead of asking customers to tip. But under New York law, calling a charge a “service fee” does not make it legal to keep. When customers reasonably believe a charge is a gratuity, 100% of that money belongs to service staff — not the business.
The Core Rule: NY Labor Law § 196‑d
New York Labor Law § 196‑d strictly prohibits employers — and third parties — from retaining any part of a gratuity or any charge that a reasonable customer would believe is a gratuity.
The law is intentionally broad. It applies not just to restaurants, but to:
- Event promoters
- Catering companies
- Venues
- Hospitality groups
- Festival operators
- Management companies
If a customer thinks they are tipping the service staff, the money must go to the service staff.
Service Charges Are Presumed to Be Gratuities
Under New York’s Hospitality Wage Order (12 NYCRR § 146‑2.18), any mandatory service charge is presumed to be a gratuity unless the business clearly proves otherwise.
To overcome that presumption, the business must make a clear, written disclosure — including on menus, contracts, and bills — stating that:
“This charge is not a gratuity and will not be distributed to service staff.”
The disclosure must be clear, conspicuous, and truthful.
If workers are told to say things like:
- “Gratuity is included,” or
- “You don’t need to tip,”
that is powerful evidence the charge is a gratuity under the law.
Why Employer Status Does Not Control Liability
A common defense is:
“We weren’t the employer — another company handled staffing or payroll.”
That argument often fails.
Under NY Labor Law § 196‑d, any entity that collects, controls, distributes, or retains gratuities can be liable, even if it did not issue paychecks.
In the Casale case, the festival promoter allegedly:
- Approved the service‑fee structure
- Controlled customer‑facing representations
- Collected or controlled the service‑fee revenue
- Retained the bulk of those funds
That is enough to trigger liability — even without traditional employer status.
Common Red Flags for Illegal Service Fees
Workers should be cautious if they see any of the following:
- Mandatory service fees of 18%–25%
- Customers told gratuity is “included”
- No itemized receipt showing where the fee goes
- Service fees labeled internally as “gratuity”
- Only a small percentage (e.g., 3%–5%) paid to staff
- Management or ownership keeping the remainder
These practices often violate New York law.
Available Damages for Workers
When service fees are unlawfully retained, workers may be entitled to:
- 100% of the diverted gratuities
- Prejudgment interest at 9% per year
- Unpaid wages (if compensation was shorted)
- Liquidated damages equal to 100% of unpaid wages
- Attorney’s fees and litigation costs
In class actions, these damages can add up quickly.
Why These Cases Are Increasing
As cities raise minimum wages and eliminate tip credits, some businesses attempt to shift costs to customers through “service fees.”
That strategy can backfire when:
- Customers believe they are tipping, and
- Workers never receive the money.
New York courts have repeatedly made clear: you cannot re‑label gratuities to avoid paying workers.
Do You Have a Potential Claim?
You may have a case if you:
- Worked as a server, bartender, or event staff in New York
- Were subject to a mandatory service fee
- Were told gratuity was included
- Did not receive the full service charge
These cases are time‑sensitive and often suitable for class actions, meaning workers can pursue claims together without fear of retaliation.
About Klaproth Law PLLC
Klaproth Law PLLC represents workers in complex wage‑and‑hour litigation across New York, New Jersey, Pennsylvania, and Washington, D.C. We focus on cases involving:
- Gratuity diversion
- Service‑fee misrepresentation
- Event and hospitality wage violations
- Class and collective actions
If you believe a service fee was wrongly withheld from you, we encourage you to contact us for a confidential consultation.
This article is for informational purposes only and does not constitute legal advice.
