What is the Difference Between an Administrative Fee and a Service Charge? Employers Should Know

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What is the Difference Between an Administrative Fee and a Service Charge Employers Should Know

The Massachusetts Supreme Judicial Court has ruled that a country club’s administrative fee that was referenced as a “service charge” in certain documents must be paid to its employees as a result. This should serve as a warning to Massachusetts employers to apply caution to how they refer to services.

This case revolves around a specific Massachusetts law, Mass. Gen. Laws Ann. ch. 149, ยง 152A. This law provides that an employer that receives a gratuity from a customer is required to distribute the total amount between its service employees proportionally to the service they provide. This law defines the phrase “service charge” as a fee charged to patrons in place of a tip. This includes any fee designated as a service charge, gratuity, tip, or any other fee that a patron may reasonably believe would be paid to an employee in addition to or in place of a tip. This means that any fee found to be a service charge must be paid to employees that provide the service.

In this particular case, the defendant was a country club that hosted events such as banquets that served food and drinks. Whenever a patron requested to hold an event, they would set forth provisions in a service contract with the club. This would set forth pricing and payment schedules, and in this contract, it would specify that an additional 10% of the price of the event would be charged for a gratuity to be paid to staff and another 10% as an administrative charge to be paid to the club. This would then be signed by the patron.

Once events were completed, patrons would be given a final bill. However, unlike with the initial event contract, this bill placed the 10% administrative fee in a category identified as service charges or simply as service in lieu of directly identifying it.

This resulted in a lawsuit filed by banquet servers alleging that this designation of the fee as a service charge requires that it be paid to workers. Initially, this case was dismissed by the trial court, which ruled that the safe harbor provision in the law permits employers to charge an administrative fee in addition to or in place of a tip so long as it is sufficiently identified. The employees appealed this case, but the Court of Appeals affirmed the trial court’s ruling.

The plaintiffs further appealed the case to the Massachusetts Supreme Judicial Court, which held differently. The Court found that the principle of contract law that holds ambiguity in a contract must be held against its drafter means it was the burden of the club to correctly identify the fee. In this case, the defendant failed to do so.

Additionally, the description of the fee as a service charge in some documents precludes the defendant’s ability to benefit from the safe harbor provision. This was particularly relevant as the invoice where the fee was incorrectly identified was given at the conclusion of events where it was most likely to impact the tipping decision of patrons. As such, the Court reversed the decision and remanded it to the lower court to enter a judgment in favor of the plaintiffs.