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Automatic Gratuity: What Restaurants Can and Can’t Do

Picture this: you’re out to eat at a restaurant, enjoying the company of friends or family. All of a sudden, the waiter brings the bill that includes an added 18-20 percent automatic gratuity. The service was decent, but not exceptional. What gives?

What is Automatic Gratuity?

Automatic gratuity, or automatic tipping, is when a restaurant automatically adds a tip to your bill.  Typically this is reserved for larger parties of 6 or more and is anywhere from 18-20 percent of the total bill.

Diners will typically see “automatic gratuity” added at the bottom of their bill after a meal. This can leave the diner in quite a predicament. Are you supposed to tip more? Extra? What if the service was bad?

As a restaurant-goer, automatic gratuity can rub you the wrong way. You want to tip based on the quality of service you received. You don’t want to tip based on a requirement set in place by the restaurant. And at the end of a meal, it leaves you feeling awkward. You may want to still tip an additional amount beyond automatic gratuity if it was exceptional service. But the fact that automatic gratuity was there in the first place makes it confusing and uncomfortable.

However, from the restaurant’s point of view, mandatory tipping is an easy way to ensure larger parties leave an adequate tip. As time goes on, it seems like automatic gratuity is becoming more and more commonplace.

What Does the Law Say?

In 2012, the IRS mandated that, as of 2014, automatic gratuity would need to be considered a service charge instead of a tip.

But what’s the difference?

Basically, a service charge is counted as wage paid to an employee, while a tip is a separate income. The restaurant may collect service charges and distribute them to employees as they see fit, whereas a tip belongs to the individual server.

Remember that because servers typically collect tips, the restaurant can get away with paying him or her below minimum wage if they so choose. However, with a service charge, the restaurant is attempting to not tip their employees so they can pay all servers minimum wages. In return, these servers’ wages may be more consistent, but those exceptional servers may not collect any additional income based on the quality they are delivering.

Either way, the IRS considers this to be a service charge. Therefore, should show up on each employee’s payroll reports as income, not as tips.

Is Automatic Gratuity Legal?

Automatic gratuity is legal, but the IRS considers it to be a service charge. Service charges must show up on all employees’ tax forms as income. It’s important to note that state laws may differ, so check with the rules in your state.

As a diner, restaurants should include a line on their menu that states their service charges, if any. If you don’t see that outlined on the menu but find a service charge on your bill, it’s a good idea to ask to speak with the manager to clarify the charge.

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