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San Francisco Superior Court: Pay Banquet Servers $9 Million

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When is a “service charge” a “gratuity”?

San Francisco, CAIn John Ordono et al. v Marriott International Inc., San Francisco Superior Court Judge Ethan P. Schulman has tentatively found that banquet servers were entitled to $8.97 million because reasonable customers might have concluded that mandatory service charges were intended as gratuities. Under California Labor Code 351, gratuities or tips belong to employees, and employers may not take them or deduct any amount from a worker's wages.

The tentative ruling relies heavily on the California Court of Appeal’s 2019 decision in O’Grady v. Merchant Exchange Productions, Inc. The legal principle may prove difficult to apply, however, because gratuities are in the eye of the beholder.

Marriott’s banquet billing

The class action lawsuit was brought by two former banquet servers for the hotel and conference space. The space is big and busy during banquet season and seats up to 5,000 people in its largest ballroom. Given normal turnover the entire class of servers is likely to include about 150 people.

Between January 2012 and November 2015, Marriott Marquis added a "service charge" of 23 percent of the food and beverage tab to the customer’s bill. From November 2015 to April 2017, the mandatory service charge increased to roughly 24 percent.

During that five-year period, the hotel distributed from 70 to 72 percent of the charge to banquet staff and retained the rest. That means that management skimmed off between 30 and 28 percent of the total.

In April 2017, the hotel revised its billing format to break the charge into a "staff charge" and a "house charge." Ordono focuses solely on the period between January 2012 to April 2017, before this change happened. The change is telling, though.

Who understood what?

Large association or group business events made up roughly 85 percent of Marriott’s banquet clientele. The hotel maintained that these event professionals generally understood that a service charge is not a gratuity. Counsel the servers disputed this assertion. It was apparently a common practice for hotels to put hotel costs into the service charge to make the food and beverage prices seem lower. It was a competitive move.

The remaining 15 percent of the hotel’s banquet customers were described as “local catering or social business,” engaged in activities like hosting events for nonprofit organizations. Attorneys for the plaintiffs argued that these groups may not have shared the same understanding.

California Labor Code 351

This section of the California Labor Code prohibits employers and their agents from sharing in or keeping any portion of a gratuity left for or given to one or more employees by a patron. It defines the term "gratuity" as a tip, gratuity, or money that has been paid or given to or left for an employee by a patron of a business over and above the actual amount due for services rendered or for goods, food, drink, articles sold or served to patrons.

Who is the customer, and if it is the organization arranging for the banquet, what does the customer understand? Is it the cost of doing business with the venue, or is it a monetary appreciation of good service? And what do the servers understand as they provide service? This is a 360-degree evaluation.

O’Grady v. Merchant Exchange Productions

Ordono was originally filed in 2016 but was stayed pending a decision in O’Grady, a very similar but more developed lawsuit. In 2019, the California Court of Appeal found that the term “’service charge’ is a protean term of no fixed meaning” and that, depending on context and the understanding and representations of the parties involved, “[t]here is no categorical prohibition why what is called a service charge cannot also meet the statutory definition of a gratuity.”

Subjective understanding is not necessarily a great place to build law. Counsel for Marriott has promised an appeal, noting the difference in the understanding of the 15 percent who might have thought that the tips were going to the servers and the 85 percent who thought not.

Why did Marriott fix the billing format if it wasn’t broken?

The 2017 revision to the Marriott banquet billing format seems to have figured prominently in the Superior Court’s Ordano ruling. Breaking the bill down into “house charge” and “staff charge” seems to suggest an effort to correct any possible confusion – which implicitly recognizes that there was or could have been confusion.

An appeal is likely. One of the possible areas of focus may be the difference in what 85 percent of the customers allegedly understood by the term “service charge” and what the remaining 15 percent understood. In the normal course of events, the amount of the award may be reduced.


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