‘Service Fees’ Are Ruled Waiter Tips
February 16, 2007
A group of workers at a Chinatown banquet hall were awarded nearly $700,000 in back pay and punitive damages by a federal judge after managers illegally pocketed a portion of their tips.
The 11 waiters and busboys at 88 Palace Restaurant had sued the restaurant claiming that the owners skimmed 25 percent of the extra fees charged for banquet parties.
Following a bench trial in Manhattan’s Southern District Court, Judge Gerard Lynch ruled that the owners of the East Broadway eatery had broken both state and federal labor laws by stealing the tips.
The case hinged on the distinction between “tips” and “service charges.” Under the law, tips must go to the wait staff, but under certain circumstances, management may claim a portion of service charges that restaurants often add to the bill for large groups of diners.
“The restaurant would add an extra 15% on to banquets,” said Rachel Passaretti, a lawyer for Skadden, Arps, Meagher and Flom, which took on the case pro bono. “Our position was that these were tips and 100% should go to the waiters, while the restaurant’s position was that it was a service charge and therefore they could keep part of it.”
Judge Lynch sided with the waiters, finding that the fees were actually tips. The ruling set an important precedent in what had previously been considered a vague area of state and federal labor laws, Passaretti said.
“The decision made crystal clear you can’t just call something a service charge,” said Passaretti. “In order for it to actually be a service charge, it has to be clear to customers it is retained by the restaurant and they must pay taxes on it.”
In his ruling, Lynch cited the owners for destroying business records relevant to the case after it was filed, and for underreporting revenues in tax filings.
“Finally, the servers have been given justice,” said Michael Chen, a waiter at the restaurant at a press conference after the ruling was announced.
The ruling marked the second legal victory for the workers. In August, a lawsuit against the restaurant’s previous owners with the same claims was settled out of court for an undisclosed separate amount of money.
The restaurant, previously known as the Triple Eight restaurant, was sold in 2002.
New York-based Skadden Arps, one of the world’s largest law firms, worked on the case along with the nonprofit Urban Justice Center, and the Chinese Staff and Worker’s Association, a local advocacy group.
Wing Lam, director of CSWA, said that although his group has fought for workers in similar cases, most were settled out of court, leaving the crucial issue of defining tips versus service charges unresolved until now.
“It sets a precedent,” said Lam, adding that he believes the ruling will encourage more underpaid workers to stand up to their bosses and have an effect on ongoing suits against four other banquet halls in Chinatown.
Lam said that after a landmark settlement with another local banquet hall, Jing Fong, in 1997, in which workers received more than $1 million in back wages after the owners skimmed their tips, it became common practice in large dim sum and banquet halls in Chinatowns around the city to charge service fees in an attempt to circumvent the law.
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