“These automatic service charges are not new, as similar mandatory service charges have been in place for large events and they are generally not considered tips. Under federal law, whether a tip is to be given, and its amount, are matters determined solely by the customer. So when the customer has no discretion whether to pay it at all, or to set the amount, these charges are not tips. Likewise, under New Jersey law if the establishment charges a compulsory service charge this cannot be counted as tip, even if the employer eventually distributes the charge to their employees. Of course, employers who impose mandatory service charges may face wage and hour law compliance challenges in ultimately distributing the money.”
“Restaurants that impose a mandatory service charge may determine how that money is distributed but the backstop is that they must always pay the New Jersey state law minimum wage $15.92 per hour for all hours worked. Effective January 1, 2026, employers must pay tipped employees a minimum cash wage of $6.05 per hour. If employers take certain steps, they may be able to apply the tips earned by that employee to the $6.05 to make up the difference to $15.92 per hour. But if the employee does not make enough in tips to reach $15.92 per hour then the employer must make up the difference. Therefore, the more of the service charge the employer keeps for itself the more it risks having to pay to ensure the employee receives at least the state minimum wage per hour.”
Charles J. Kocher, Esq., Partner at McOmber McOmber & Luber, P.C.
