Well this appears to be the basis upon which the restaurants are doing it:
Automatic Gratuities Just Became Far More Problematic For Restaurants Tips For Improving Your Tips
"In practice, here is how it works. If you have a cup of coffee, you pay a tip. If a large group from your office goes out for happy hour, the restaurant may tack on an automatic gratuity. If you plan your company’s holiday party for 100 people, you will likely sign a contract that includes a service charge. In all three cases you might consider it a tip. The IRS has made it clear that they disagree.
In June, 2012 the IRS issued a ruling that took effect on January 1st. They clarified that for tax and wage purposes that automatic gratuities are to be treated as service charges. The amount given to the servers should be considered wages and not tips. The full amount of the automatic gratuity should be considered revenue by the restaurant. This creates significant changes in that completely change the way servers and restaurants treat this money.
For restaurants, they must pay taxes on this income. They should also be charging sales tax on this amount since it is being paid to the restaurant. This also precludes them from applying the gratuity to the tipped employee wage credit. Most states allow employers to pay tipped employees less than the minimum wage by taking a credit for the amount of tips that employee receives. Effective Jan 1st, automatic gratuities cannot be applied to that credit. This means tipped employees working exclusively on tables who have an automatic gratuity added must be paid the full minimum wage.
This may seem like good news for servers, but it opens the door for some disastrous consequences. First, since the automatic gratuity is a wage it may be withheld until payday and be fully taxed. Second, since it is now considered a service charge, the restaurant may retain any or all of the automatic gratuity. Third, if the server is also waiting any tables not subject to the automatic gratuity, the previous two points apply and the server can still be paid at the lower hourly wage. (While the third point is technically true, I pity the restaurant that has to defend that technicality in a class action lawsuit.)
So the question becomes, “who benefits from this ruling?” The big winner is the IRS and local governments. They just became able to tax the automatic gratuity as revenue, wages, and sales. The next winner is the unscrupulous restaurant owner. They now have carte blanc to retain what the guest perceives as an employee’s tip and pay the server a flat hourly wage for as long as they can fight off lawsuits based on the technicality of the law.
The losers in this ruling are honest restaurant owners who choose to do the right thing and remit all of the automatic gratuities to their staff. Servers that work for unscrupulous owners will now see them legally stealing their income until they can win a court ruling and countless appeals. The biggest loser is the guest. Now they have no idea where their “tip” is going and will receive service that reflects no incentive to earn a larger tip that will only line the pockets of the restaurant owner."
Which also led me to this cite of related cases:
Three Court Rulings You Should Be Aware Of - The Manager s Office
Roussell v. Brinker Int’l Inc.: This case addresses more directly which employees can and cannot be included in a tip sharing arrangement. The Department of Labor Wage Hour Division’s
Field Operations Handbook (which you need to be familiar with if you operate a restaurant) clarifies some of the positions that are eligible and ineligible for tip sharing. One position they did not clarify was the “expediter” or as they were called by Chili’s the “QA.” The court in this case ruled that the position did not meet the standard of a “customarily and regularly” tipped position. The court awarded the 55 servers covered in this case over $1.7 million according to their attorney. They also found that the burden for showing the legality of the tips sharing arrangement falls on the restaurant and not on the employees.
Davis et. al. v. Four Season Hotel Limited: This case clarifies the restaurant’s burden in charging a “service charge” as opposed to a tip or gratuity. Many restaurants have adopted the hotel and catering industry practice of keeping a percentage of the “service charge” that is interpreted by the guest as a tip for the servers. The courts ruled against the hotel here by stating that at least some of the guests were not aware that this charge was not going directly and entirely to the staff. New York has been proactive on clarifying the burden that restaurants must meet to collect a portion of this charge. Previously, the courts had lowered the standards by stating that that if no tip credit is taken, the employer could take a portion of the charge (Cumbie v. Woodie Woo Inc.).
The Department of Labor has since contradicted the ruling in the recent updates stating “[t]ips are the property of the employee whether or not the employer has taken a tip credit.” (
29 C.F.R. § 531.52).
Might be a problem on the customer end as well, I also found this:
Can You Refuse to Pay a Mandatory Tip - Law and Daily Life and from that page Update here:
Couple Busted for Refusing to Pay Tip NBC 10 Philadelphia and the follow up here
Theft Charges Dropped Against No-Tip Couple NBC 10 Philadelphia ~ The police had to drop their charges because it wasn't a case of theft. It would likely be considered a tip in court, and a gratitude cannot be 'forced' essentially.
