Let those pesky service charge rules be pesky no more. When in doubt, three words sum up the relevant law—crystal clear disclosure.
A server at a Hawaiian resort brought a class action on behalf of 100+ servers, porters, bartenders and other tipped employees (referred to collectively herein as servers) claiming inadequate disclosure to customers of how service charges were applied1. The lawsuit claimed customers were misled to believe the service charge was a tip, resulting in a significant hit to workers’ income.
Hawaii has a law, not unlike many states, that mandates restaurants must either:
1) distribute the totality of service charges to servers as tips, or
2) clearly disclose to customers how the surcharge is applied.
The statute’s worthy purpose is twofold: reduce consumer confusion and protect servers’ tips.
The offending language in the hotel’s banquet contract read, “We allocate a portion of the service fee to our employees as tips or wages and a portion of the service fee to pay for costs other than wages and tips.”
The court understandably deemed this ambiguous. Mused the court, “Does a portion of the service charge mean nearly all of it? Or almost none of it? It’s any consumer’s guess.” That guess is complicated further by the reference to not just tips but also wages. Indeed, the customer is left in a quandary—to tip or not to tip, and if so, how much?
In response to complaints, the resort modified its disclosure as follows: “All food and beverage functions are subject to a mandatory 22% surcharge, which consists of an 18.7% gratuity ... distributed to those F&B staff serving you, and the remaining 3.3% is retained by the hotel to cover non-itemized costs of the event (and is not distributed as a tip to hotel employees) ... “. This disclosure passes muster. Specifying the percentages avoids customer confusion, and also inadvertent short-changing of servers.
Bottom line: When the entire service charge is distributed as tips, no disclosure is necessary. When no part of the charge is treated as tips, the employer must so inform the customer. When some but not all is treated as tips, the employer must clearly disclose the amount or percentage paid to workers as tips and the amount or percentage that is otherwise applied. In addition, check the law in your state to ensure compliance with any additional mandates.
Sources:
- Rodriguez v. Mauna Kea Resort LLC, 2025 WL 2438306, __P3d__(HI,,Sup.Crt, 8/25/2025).
This article was originally published in the November/December edition of Hotel Management magazine. Subscribe here.