Some restaurants in Atlanta, Charlotte, and other cities have begun adding a service charge to diners’ bills. The trend has grown enough in the District of Columbia, for example, that its attorney general recently warned restaurants that those charges must be fully disclosed. Businesses often justify service charges as a way to fully compensate their employees. For employers, service charges may be a way to shift labor costs to customers without the need to observe legal limits on distribution of tips.

Legally, a service charge is a mandatory fee added to a customers’ bill. Because it is not an optional gratuity, it is not considered a tip. This means that service charges belong to the business and not the server. They can be shared with back-of-house workers without violating Fair Labor Standards Act restrictions on tip pooling or prohibitions against requiring servers to share gratuities with non-tipped employees. Service charge proceeds paid to employees should be treated as non-tip wages that would be included in the employee’s regular rate for overtime calculation purposes.

While service charges provide businesses with more flexibility in terms of distribution as compared to tips, they can be unpopular among tipped employees. Customers who incur service charges may be less willing to provide a gratuity on top of those charges. However, restaurants and some other businesses may want to consider use of service charges as part of their employee compensation strategy.

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