Massachusetts Supreme Judicial Court Addresses ‘Service Charges’ Under the Massachusetts Tips Act

Massachusetts is seeing an increase in Tips Act claims, and the Massachusetts Supreme Judicial Court (SJC) just reinforced that a lack of clarity in fee- and tip-related documentation may result in employer liability, including mandatory treble damages and attorneys’ fees. The Massachusetts Tips Act requires that an employer or person who collects “service charges” or “tips” (as those terms are defined under the act) remit the proceeds of those charges to service employees and waitstaff in proportion to the services the employees provided to the employer. Massachusetts has a long history of protecting service employees’ ability to collect tips and service charges, and the recent decision handed down by Massachusetts’s highest court in Hovagimian v. Concert Blue Hill, LLC serves as a reminder that employers may want to take care when drafting contractual documents.

Key Facts

Concert Blue Hill, LLC, doing business as Blue Hill Country Club, had a three-step process for its patrons to contract for events. Step one involved the patron signing an event contract, which included payment schedules, event hours, pricing, and other information. The event contract contained specific language that the patron would be charged a 10 percent “gratuity,” to be distributed entirely to waitstaff and service employees, as well as an additional 10 percent “administrative” or “overhead” charge to be retained by the club, on all food and beverage purchases.

After scheduling an event, the country club would issue a “banquet event order invoice,” which the patron would execute, that included details about the upcoming event at the club. This order invoice broke the monetary charges into three categories: “charges,” “taxes,” and “service charges and gratuities.” Unlike the event contract, this invoice did not specifically list the 10 percent administrative or overhead charge, but the club still intended for that charge to equal the 10 percent “service charge” on the final bill.

Finally, after the event, the patron would receive a second invoice from the club. This post-event invoice included a section called “service and tax charges” that listed three separate categories of charges: “tax,” “gratuity,” and “service.” Just as with the banquet order invoice, the final invoice did not specifically list the 10 percent administrative or overhead charge as set forth in the initial event contract.

The plaintiffs, former service employees at the country club, brought suit against the club and some members of the club’s managerial staff claiming the club violated the Tips Act because it did not remit all of the “service charges” to tip-eligible employees, as required by the act. Blue Hill prevailed at the trial and appellate levels.

The Supreme Judicial Court’s Analysis

The SJC reversed the appellate court’s decision. In rejecting Blue Hill’s argument that the language in the initial event contract containing specific reference to a 10 percent administrative or overhead charge controlled, the SJC focused on Blue Hill’s inconsistently drafted documents.

The court stated that if the language in the event contract describing the fee to be kept by the club as “administrative” or “overhead” and listing “a separate fee as a ‘gratuity’ … to be distributed entirely to wait staff … [w]ere … the only language to consider, … the disputed charge [would] not fall within the definition of a ‘service charge’ under [the Tips Act],” thus allowing the club to retain the disputed charges. However, the two subsequent invoices in Blue Hill’s three-part transaction process “clearly listed the disputed fees as a ‘service charge’” that belonged to the waitstaff and service employees. This drafting error led the SJC to side with the plaintiffs in its decision.

Blue Hill argued that because the event contract described the disputed fee as an “administrative” or “overhead” charge, the court should disregard the designation of the fee as a “service” charge on the subsequent invoices given to patrons. The court, however, was not persuaded, finding that accepting Blue Hill’s argument would require the court “to disregard the unambiguous language” in the subsequent invoices.

In considering the plain meaning of “service charge,” the SJC noted that ‘“[i]nconsistent representations to customers increase the likelihood that waitstaff will lose out on earnings,” given that customers may “rely on pre-event contracts to budget” for event costs, but “‘tend to rely on the final invoice to determine whether to add an extra tip for waitstaff.’” (Emphasis added.) The SJC also noted the two-month difference in time between when the patron executed the event contract and the issuance of the final invoice, stating that “a patron cannot reasonably be expected to base his or her tipping decision on a contract signed months earlier, rather than on the final invoice” that comes out right after the event actually occurs.

Finally, Blue Hill argued that a “safe harbor” provision in the Tips Act allowed it to retain the disputed fees, and that it had included language invoking that safe harbor provision in the event contract. The court, however, held that Blue Hill still needed to have “give[n] patrons a sufficient ‘designation or written description’ of the fee,” and that because Blue Hill had described the disputed fee as a “service charge,” the Tips Act’s safe harbor provision was inapplicable.

Conclusion

The Hovagimian case serves as a cautionary tale for employers when they are drafting documents related to employee compensation. As the SJC noted, “All Blue Hill (or any employer) [would have needed to have done] to avoid liability to its wait staff employees for an amount labeled as a ‘service’ charge that the employer intend[ed] to retain [was] … be conscientious and consistent in its drafting.”

Employers with waitstaff and service employees may want to review their contracts and related documentation in light of this decision, as the costs for incorrect documentation—including treble damages and attorneys’ fees—can quickly add up.