My restaurant adds an auto-gratuity for big parties. Does that money have to go to me?

Example

A party of eight has a $400 check. The menu says parties of eight or more get an automatic 18% charge: $72. The host also writes $20 on the tip line (illustrative).

1. 1If you get the $72: DOL treats service charges paid to employees as wages that go into your regular rate of pay for overtime.
2. 2If your employer uses it to pay your $2.13: DOL says that’s allowed. It can also use it to top you up to $7.25.
3. 3If you get none of it: federal law doesn’t require a share. Check your state’s rule and what the menu or banquet contract says.

Not tax or legal advice. The percentage and amounts are made up. For how the IRS treats the two, see Does an auto-gratuity count as a tip for the deduction?

Plain English

Why an auto-gratuity isn’t a tip

Federal regulations define a tip as a sum a customer gives “as a gift or gratuity,” where whether to give it, and how much, “are matters determined solely by the customer.” They say a compulsory charge for service, such as 15% of the bill, “is not a tip,” even if the employer passes it on to employees. The same goes for amounts a hotel negotiates with a customer for banquet staff. Those sums become part of the employer’s gross receipts.

What your employer can do with it

DOL’s investigator handbook says the employer “has complete discretion” over how a compulsory service charge is used, including using it to pay servers and bussers. When it’s paid to employees, it counts as wages and goes into the regular rate used for overtime. The employer can use it to pay the $2.13 cash wage, or to make up the gap when tips fall short of $7.25.

When a “gratuity” is really a tip

The label on the check doesn’t decide it. DOL looks at whether the guest really had a choice: whether the payment was mandatory or optional, whether guests were told they could raise or lower it, and whether the amounts actually vary. If the guest could change or remove it, it may be a tip, and then it’s yours.

Your state may have stricter rules

This page covers federal law only. Your state may have its own service-charge rules, for example about what the menu has to say or who the charge goes to. When state law protects you more, DOL says your employer has to follow it. DOL keeps a list of state labor offices.

What to ask your manager

“Does the auto-gratuity on large parties go to the servers, and how is it split? Is it on my paycheck as wages?” Ask for the answer in writing, and keep the menu or banquet contract wording.