Case by Case – Tips, Gratuities and Fees

December 23, 2012

TIPS, GRATUITIES & FEES: An Introduction to Add-On Expenses

by Thomas Ishmael

The service industry is one of the last bastions of cash. You undoubtedly know from experience that bartenders, bellmen, valets and others in the business work for tips. The meeting industry is replete with tips, gratuities and service charges of all sorts. Industry co-workers and clients alike find the practice mystifying.

This article should serve as a quick primer on gratuities, service charges, tips and other fees common in the meeting and event profession.

Everyone knows service industry employees work for tips. Anyone that has earned their stripes in the industry will acknowledge that taking care of the people on the front lines pays dividends. Even so, few people understand who gets tipped what and when.

It is easy to understand why people find tipping confusing. Typically, who gets tipped, and how much, is a decision that depends on the circumstances.

In a restaurant, a guest is likely to leave a tip after enjoying a well served meal. But, the same guest enjoying the same meal and delightful service at a banquet facility is unlikely to ever reach in his pocket to tip his server. Oddly, though the services are similar, the way the people rendering them are paid differs.

In the scenario above, the restaurant server would be paid a gratuity or tip. According to the IRS, a tip is a sum a customer gives as a gift or gratuity in recognition of service rendered. See 29 C.F.R. § 531.52. Because tips are considered “gifts” under the law, whether to give one, and for how much, are entirely at the discretion of the person or entity giving it. When the server is paid the tip, it is considered payment for employment and subject to federal and state income tax laws.

But what about the banquet server? In the meeting business, event planners and salespersons often negotiate gratuities for service staff upfront. The most common method of meeting facilities passing these costs along to consumers by way of the ubiquitous “service charges” found in event contracts. Confusingly, sometimes service charges within banquet contracts are itemized as “gratuities.”

Federal employment and tax laws distinguish between voluntary “tips” and mandatory “service charges.” A service charge is not a gratuity. Some common service charges are: a property charging a flat eighteen percent “gratuity” for labor associated with coffee service, a per-bag delivery charge for hotel bell-men helping your group at check-in, per carving station chefs, a per meeting audio visual fee, etc.

Service charges belong to the establishment itself, not the individual rendering the service. Money collected from service charges is considered to be part of the establishment’s income. Many companies use the revenue from the service charges to defray the expense of overhead. Some distribute the money back to the employees. Usually only a small portion of whatever “service charge” is levied makes its way back to the people doing the work.

To ensure that you take care of the people taking care of you, and avoid confusion with your clients, you should address gratuities when negotiating an event contract. Make a practice of budgeting for gratuities before searching out a venue. And, do not execute the event contract if it fails to spell out the nature of all the gratuities it mentions. Itemize the set-up crew, banquet servers, barternder(s), banquet captain(s), banquet chef(s), A/V expense(s), conference service manager, bellmen, doormen, valets, etc. The agreement should say how much per day or shift the person laboring will earn from the “gratuity” paid. Of course, extraordinary service may always be rewarded with a generous “tip.”

By breaking down who gets what before the big event, you can avoid confusion later.

Thomas Ishmael is an attorney with Hornbeek Vitali & Braun, PLLC in Oklahoma City. Hornbeek Vitali & Braun represents hotels, restaurants, bars, golf courses and others in the hospitality industry. Ishmael has more than 15 years working in the hospitality industry specializing in luxury hotel and resort management.

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This column is meant to provide practical advice, tips and rules of engagement you need in the meetings and events industry. However, please consult with legal, insurance and tax professionals before acting on any information presented in this column.

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