Legislation Proposed to Limit Effect of World Yacht Service Charge Decision

The scope of liability under Samiento v. World Yacht, the landmark 2008 decision by the New York Court of Appeals, is facing a challenge from New York legislators.  A proposed Senate Bill and an Assembly Bill in the New York State Legislature seek to eliminate past liability for catering halls and restaurants for improper retention of mandatory service charges held out to customers to be gratuities. The battleground of the proposed legislation is Section 196(d) of the New York Labor Law, which currently provides that an employer or his agent cannot accept “any part of the gratuities, received by an employee, or retain any part of a gratuity or of any charge purported to be a gratuity for an employee.”  The New York Court of Appeals, in Samiento v. World Yacht, Inc., 10 N.Y.3d 70 (2008), interpreted this provision to mean that a restaurant cannot add a “service charge” or gratuity to the bill without passing it on to the waitstaff.  In other words, a restaurant cannot keep a “service charge” or gratuity that it leads customers to believe will be given to the waiters.  However, if the restaurant adequately conveys to the customer that the charge is not going to the waitstaff (i.e., by referring to it as an “administrative fee”) then the restaurant is allowed to keep all or a portion of the charge, but not any additional amount the customer intends for the waitstaff. Under the Hospitality Wage Order, which went into effect on January 1, 2011, a charge for the administration of a banquet, special function, or package deal must be clearly identified as such and customers must be notified that the charge is not a gratuity or tip. However, the employer has the burden of demonstrating, by clear and convincing evidence, that the notification was sufficient to ensure that a reasonable customer would understand that such charge was not a gratuity. Under the Hospitality Wage Order, adequate notification includes a statement in the contract or agreement with the customer, and on any menu and bill listing prices, that the administrative charge is for administration of the banquet, special function, or package deal, is not a gratuity, and will not be distributed as gratuities to the employees who provided service to the guests. The statements must use ordinary language, which can be readily understood and appear in a font size similar to the surrounding text, but no smaller than a 12-point font. The proposed legislation is intended to give the effects of the Samiento v. World Yacht decision only prospective treatment.  From the point of view of the restaurant lobby, the decision in Samiento v. World Yacht reflected a change in the law, and restaurants and caterers should not be punished for the Court of Appeals’ interpretation.  From the point of view of workers, an employer who infers to its customer that a service charge or gratuity will be given to its service staff should be held accountable for actually paying those gratuities to the servers. The significant liability for restaurants and catering halls under the Samiento v. World Yacht, Inc. decision was underscored by the recent $8.5 million settlement of servers with Pier Sixty. The complaint against Pier Sixty, a premier banquet hall in New York City, alleged that the banquet facility misappropriated gratuities when it charged its customers a 20-22% service charge but failed to distribute the service charge monies in full to its waitstaff.