When Is A Gratuity Not A Tip?

Linda Jagiela
Posted on September 29, 2009
GRATUITY: Something given voluntarily or beyond obligation, usually in response to or in anticipation of service.
Most limousine companies automatically add 18-20% “gratuity” to their bills. Is this really a gratuity or is it a service charge? I personally hate restaurants who add gratuity to my bill. What if the service is bad? Can I reduce it? Not likely, unless I want to cause a scene. Most people are not confrontational and will not make a scene. They also may not go back to the restaurant.
Before my friend and NLA board member Mike Renehan gets mad at me again, let me take a position. I understand why gratuity is added into the cost of the ride. Corporate clients typically don’t exchange money. The transaction is billed back to the company and the gratuity is agreed upon in advance. I believe that most companies do indeed give 100% of that gratuity to the chauffeur. I also believe that without having it built in that the chauffeur will more often then not be stiffed because we (as an industry) have conditioned clients to having the gratuity built in.
In the same respect, how many of you have had someone call in asking that the gratuity be reduced to the chauffeur? If you have, I would expect those calls to be in the single digits. We have taken the “voluntary” piece of tipping away from the consumer. So is that tip really a service charge being passed on to the chauffeur?  
If the tip is not a tip, another issue arises — the money that is given to the employee chauffeur is part of his overall compensation and therefore included when calculating overtime pay. Why does this come up? The National Limousine Association has posted on its website  a “Wage and Hour Law Primer for the Chauffeured Transportation Industry” prepared by NLA general counsel Keller and Heckman LLP in Washington, D.C. It contains the attorneys’ explanation of various operating models for chauffeured vehicle companies in the U.S. The 22-page document is sober reading for our industry. I bring it up because the document address gratuity and the overtime issue. It says:
“the DOL opined that a limousine operator must calculate an employee’s overtime pay by first calculating the employee’s regular rate of pay. The regular rate of pay is the ratio between all dollars received by the driver in a regular work week, including base hourly pay, flat fees, and imposed gratuities, and the total hours the employee actually worked in that regular week, including time actually spent washing and fueling a car, time actually spent driving to and from the dispatch center to the passenger’s place of pick-up, and all time waiting for a passenger. Under the method proposed by that company, a chauffeur would be paid a cash wage of $2.13 per hour in addition to a 15% “imposed gratuity” that would be added to every reservation and transferred through directly to the chauffeur. This imposed gratuity would not be included in the employer’s gross receipts, and customers would be informed that they may provide an additional gratuity. The company proposed to calculate the regular rate of pay (for purposes of overtime) by adding the cash wage of $2.13 per hour, the imposed gratuity, and non-imposed tips up to the tip credit of $4.42 and then dividing by the hours worked. The proposed compensation scheme includes the 15% “imposed gratuity” in the amount applied to the tip credit. The Department of Labor regulations distinguish between a tip voluntarily paid by a customer and a mandatory charge imposed upon the customer. “Whether a tip is to be given, and its amount, are matters determined solely by the customer.” For example, a compulsory charge for service – such as 15% of the amount of the bill – imposed on a customer by an employer’s establishment is not a tip and, even if distributed by the employer to his employees, cannot be counted as a tip. Even though the imposed gratuity may never be considered part of the company’s gross receipts, the imposed gratuity is not a tip because it is not optional for the customer.”
Don’t shoot the messenger folks. The DOL is saying that imposed gratuity is not gratuity — it is a service charge! For those of you paying workers’ compensation, this also throws a monkey wrench into the equation. What base of pay do you use to determine what you are paying workers’ compensation on?
I leave you this tip: If you haven’t read the document on the NLA website, you may want to spend time doing so. It makes interesting reading and is very thought provoking.

— Linda Jagiela, LCT East Coast Editor 

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