What you need to know about automatic gratuity laws for restaurants

Editorial Team

4 min read
Group ordering from menus at restaurant

In recent years, the practice of automating gratuities has emerged as a major consideration for merchants, who often see it as a way to retain employees and make life easier for customers. Charging an automatic gratuity can benefit consumers who increasingly rely on convenient payment methods. And, on the business side, it can help streamline operations.

However, before you fully embrace an automatic gratuity model at your restaurant, it’s important that you understand applicable federal and state laws. In this post, we’ll delve into the nuances of automated gratuities and tips, so you can navigate this terrain while staying compliant with legal regulations.

What is automatic gratuity?

Automating gratuities basically means adding a predetermined tip percentage to a customer’s pre-tax bill, automatically. The goal for adding an automatic gratuity is to ensure fair compensation for service staff while simplifying the tipping process for both customers and merchants. You may have come across automatic gratuities when eating out with large groups of people–it can be a relief for large parties not to have to calculate the tip when 10+ people are trying to figure out how to split the bill. 

There are other benefits to adopting an automatic gratuity system, as well. It can eliminate the wage gap between front of house and back of house, alleviate competition between servers, and reduce confusion for customers. 

Automatic gratuity vs tip

While the terms “gratuity” and “tip” are often used interchangeably, they’re not exactly the same thing. A tip is generally offered directly to staff in recognition of their efforts during the meal. It’s entirely voluntary, and there’s no set amount or percentage (even if 20% is customary). Guests simply choose an amount to tip based on their personal practices or experiences. 

An automatic gratuity, on the other hand, is technically a service charge–that’s how the IRS defines it–and you’ll need to report it separately from tips when doing your taxes. Service charges can also include charges for bottle service, banquet event fees, and cruise package fees, to name a few. 

Whereas employees usually collect tips on a daily basis, fees collected as automatic gratuities are distributed to employees as part of their paycheck. Similarly, the IRS requires that any service charges distributed to employees be reported as non-tip wages.

The legal aspects of automatic gratuity

Sometimes known as a forced gratuity, the automatic gratuity practice is nevertheless completely legal. While state laws vary somewhat on specifics, in general you’re required to communicate to customers what they’ll be charged for and how much it’ll be. Many state laws also stipulate that gratuity laws should be stated clearly on the menu and/or that servers inform customers about what fees they can expect.

Be sure to research your state’s laws governing tipping and/or gratuity policies to ensure the policies you choose to implement align with legal requirements. Regardless of what policies you choose to put in place, you can foster trust and prevent potential misunderstandings with customers by making your policies transparent and keeping communication open with employees and customers.

Do you still tip if gratuity is added?

When automatic gratuity is added to the bill, guests may wonder whether they should leave an additional tip. And while some customers dislike service fees and would rather not pay them at all, other customers might feel like they want to leave a little extra as a gesture of appreciation.

One way to provide clarity for your customers is to have a clear policy that you communicate through various channels. For example, in addition to stating your policy on the menu, you could also inform customers when making reservations online and when they arrive. Wherever you state your policy in writing, you can include a note to clarify expectations for your customers. Consider, for instance, something like: “No extra tips are expected” or “Additional tips are not necessary but always appreciated.” 

Resources for merchants

To help navigate the complexities of automatic gratuity and other tipping policies and strategies, be sure to check out these posts, too: 

As long as you stay mindful of legalities and clear communication, automating gratuities can help enhance employee satisfaction, streamline operations, and foster a team employee environment. 

Whatever gratuity policy you choose, Clover’s POS systems can help simplify the process, offering options for time tracking, payroll integration, and tip management tools. 

To learn more about our restaurant POS systems, contact a Clover Business Consultant today.

This information is provided for informational purposes only and should not be construed as legal, financial, or tax advice. Readers should contact their attorneys, financial advisors, or tax professionals to obtain advice with respect to any particular matter.

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