A service charge is not a tip. That sentence is worth saying plainly, because on the close report they can look almost identical: a percentage of the bill, sitting on top of the food and drink total, paid by the guest. Underneath, they are two different things, treated differently by the law, and mixing them up is one of the easier ways for a multi-location operator to build a problem without noticing.
Here is the difference, and why it matters at 11pm.
What is a tip?
A tip is money the guest chooses to leave. The amount is up to them and they can leave nothing at all. Under the Fair Labor Standards Act, tips are the property of the employee who received them. An employer cannot keep them, and managers and supervisors cannot take a share of them, other than tips a manager receives directly from a guest for service the manager personally and solely provided.
Because tips belong to the worker, the rules around how they can be pooled and shared are specific. That is the whole reason tip pooling has its own body of law.
What is a service charge?
A service charge is money the restaurant adds to the bill. The operator sets it, the guest has to pay it, and it appears whether or not the guest was happy with the service. Common examples are an automatic gratuity on large parties, a percentage added for banquet or private dining, a delivery fee, or a flat "service" line on every check.
Under federal law, a compulsory service charge is not a tip. The Department of Labor's Fact Sheet #15 says it directly: a compulsory charge for service, for example 15 percent of the bill, is not considered a tip. It is revenue to the business. The operator can keep it, use it toward wages, or share it with staff, but when it is paid to staff it is wages, not tips.
That single distinction drives everything else.
Why the difference matters at close
Three places it shows up.
Who owns the money. Tips belong to the worker from the moment the guest leaves them. A service charge belongs to the business until the business decides what to do with it. If your close process treats an automatic gratuity on a party of ten as though it were a tip, the money is being categorized as employee property when, legally, it is not.
How it is taxed and reported. Tips and wages are reported and taxed differently, and money from a service charge that is paid to staff is treated as wages. That affects payroll, overtime calculations and the records you keep. This is the part to take to your accountant or payroll provider rather than a blog post, but the starting point is knowing which bucket each dollar sits in.
What can go into the tip pool. A tip pool is made up of tips. Putting service charge money into the same pool, or running both through the same calculation as though they were the same kind of money, means the pool is no longer just tips. Whether and how service charges can be distributed to staff, and whether they need to be handled separately from the tip pool, depends on your state. Several states have their own rules on service charges, including disclosure requirements to guests.
The safe default, and the one to build your close around: keep the two separate in the calculation. Tips go through the tip pool logic. Service charges go through whatever policy you have set for them, as wages if they are paid to staff.
How a service charge should appear on the check
If you use a service charge, most states and the Federal Trade Commission's rules on unfair or deceptive practices point in the same direction: be clear with the guest about what it is. Call it what it is on the menu and the check. If it is not going to staff as a tip, do not let the guest believe it is.
Clarity with guests is also clarity with staff. A server who sees "service charge 20%" on a large party check and assumes it is theirs is a dispute waiting to happen at close.
What to check with your state
Before you add a service charge to your tip pool, or before you assume it can be kept by the business, check three things with your state labor agency:
- Whether your state treats mandatory service charges as wages, as tips, or as something the operator can keep
- Whether your state requires you to tell guests where the service charge goes
- Whether the state has rules on distributing service charges to staff, and whether those distributions are treated differently from tips for overtime and payroll
Rules vary. The Department of Labor keeps a state-by-state table of tipped minimum wage rules, and most state labor departments publish their own guidance on service charges. Check the source, note the date, and write your policy down.
Where Ferry fits
The reason this matters to a multi-location operator is that a manual close does not naturally keep tips and service charges apart. They arrive on the same POS report, they get typed into the same spreadsheet, and the distinction disappears in the math.
Ferry Tip Manager pulls the data from your POS and runs the tip pool calculation on tips, with the tip pooling logic you have configured. Service charge money does not get treated as pool tips by default. Keeping the two separate in the calculation, every night, at every location, is a large part of what makes the close clean and the records defensible.
Tip pooling laws vary by state, and they change. How your pool handles that is a decision for you and your counsel.
Want to see how Ferry keeps tips and service charges separate at close? Book a Chat.
FAQ
What is the difference between a service charge and a tip?
A tip is left voluntarily by the guest, in an amount the guest chooses, and legally belongs to the employee who received it. A service charge is added to the bill by the restaurant, is mandatory, and belongs to the business. Under federal law a compulsory service charge is not a tip, and if it is paid to staff it is treated as wages.
Is an automatic gratuity a tip or a service charge?
Under federal law, an automatic gratuity that the guest is required to pay is a service charge, not a tip, because the guest did not choose the amount. Some states have additional rules on automatic gratuities. Check your state labor agency.
Can a service charge go into the tip pool?
Service charge money is not tips, so by default it should not be mixed into a tip pool. Whether and how service charges can be distributed to staff depends on your state. Keep the two separate in your calculation and check your state's rules before distributing service charge money.
Do I have to tell guests what a service charge is for?
Disclosure rules vary by state and city, but being clear on the menu and the check about what a service charge is and where it goes is the safe approach and avoids disputes with both guests and staff.