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News & Press: Laws & Regulations

Judge Says NO To Surcharge Lawsuit

Wednesday, August 13, 2014  
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In a huge victory in the fight to protect restaurants from frivolous lawsuits, a class action lawsuit against the owner of several well-known restaurants in Manhattan was dismissed by U.S. District Judge Katherine Polk Failla. The plaintiff in the case alleged restaurants adding an “automatic” gratuity to the bill, even when that gratuity is plainly disclosed on the menu, are engaging in a deceptive and unlawful practice under New York City law. Second, he alleged that restaurants not listing drink prices on their menu is a deceptive and unlawful practice that is actionable under New York City law.

The judge dismissed the allegations of the plaintiff because the restaurant "conspicuously" showed the tip on its menus before diners placed their orders, and that diners were free to leave if they disapproved. She also said New Yorkers often leave tips of 18 percent to 20 percent, undercutting the argument they might feel "tricked" into having to fork over tips at the low end of that range. Further, she ruled failing to list drink prices caused no harm, and was not misleading because reasonable customers could ask about prices before ordering.

The scary potential liability in this case was based on the plaintiff’s claim that he wanted to collect all automatic gratuities that had been charged and paid to service staff by the restaurants for all customers. The good news for the industry is the judge ruled that while New York City has its own laws on menu surcharges, private diners cannot use them as a basis to sue, even by attempting to classify the violations as a violation of the State’s General Business Law consumer fraud provisions.  This will hopefully limit the possibility for future cases of this type.

Key takeaways from this case and the relevant NYC and NYS laws cited above include:

  • NYC Rules remain ambiguous as to the use of service charges on menus. While the Department of Consumer Affairs has continued to abide by a letter opinion issued at the request of the NYS Restaurant Association in the 1990’s and allows such charges, the Association has submitted a new legal interpretation request to ensure such charges to not violate NYC Rules;
  • NYC Rules prohibit deceptive practices in business dealings with customers. So, all food and beverage costs should be clearly indicated on menus;
  • Operators are encouraged to never use the term “service charge” on a bill, contract or menu as NYS will likely interpret such charge as a gratuity and require it be distributed in its entirety to service staff. The only acceptable term to use for a charge not being distributed to staff is “administrative charge” and the NYS Department of Labor safe harbor language should be used; and,
  • A recent IRS revenue ruling will now treat all “automatic gratuity” charges as administrative charges and make all automatic gratuity charges subject to tax as revenue and not as gratuities -- the use of automatic gratuity should be carefully considered before using it on menus, bills, or contracts and all operators should consider the tax implications of automatic gratuities.
For more details or questions you may have regarding service charges and automatic gratuity, contact the NYS Restaurant Association team at 800.442.5959 or

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