Since Seattle's new minimum-wage law took effect on April 1, restaurant owners have looked at various ways to accommodate higher compensation for their employees—for example, Ivar's Salmon House raised prices and eliminated tips. A month later, Renee Erickson eliminated tips at her three restaurants in favor of an 18.5 percent service charge. And in a recent article on Eater Seattle, several restaurant owners in the city said they think others will be following Erickson's lead and opting for service charges in the coming months.
"The plus of service charges is that it's really kind of like a full-on Uber experience," said prolific Seattle restaurateur Ethan Stowell. "You just sign the check and it's done." (Although Stowell and his business partner and wife, Angela Stowell, haven't yet decided how to handle higher labor costs at their 9—soon to be 12—restaurants.)
Those who find discretionary tipping a nuisance may think service charges are a more straightforward, transparent method of compensating restaurant servers, but how they'll be implemented and distributed to workers, as well as how the city will monitor the process, is murky.
According to Washington State law, service charges are different than tips because they are compulsory; customers do not have a choice whether or not to pay them. "Technically, a service charge is just employer income," said Karina Bull, interim director of the Office of Labor Standards, which oversees education and enforcement of the new minimum-wage law. "It's like a higher-priced menu item; it's no different. Consumers have the right to know where this money is going."
Also unlike tips, restaurant owners aren't legally obligated to distribute service charges to their employees. "In lots of cases, service charges impersonate tips from the consumer's perspective but actually just go into the pocket of the employer," wrote Sage Wilson of Working Washington, a worker-advocacy organization, in an e-mail. "It's pretty clear under the law that you can call anything a service charge and do with it what you will." (This isn't the case in SeaTac, however, where the new minimum-wage law requires that employers distribute service charges to workers.)
Stowell said he's concerned some restaurants might take advantage of the lack of clarity with service charges. "The money should not just go to the restaurant," he said. "And some restaurants would do that." (Stowell acknowledged that one of the reasons he and his wife haven't yet decided on whether or not to implement service charges is because of what it will mean for their bottom line. "The downside [of service charges] is what you do with all the money. There's tax implications to it," he said, referring to the higher taxes he'd have to pay because of his increased income.)
Adding to the confusion is that both state law and Seattle's minimum-wage ordinance require businesses to disclose on menus or receipts what percentage of a service charge goes to workers—even though they don't technically need to even go to workers. "It needs to say exactly what the percentage is," said Bull. "Is it 20 percent to the server? Is it 20 percent to front-of-house employees? Is it 20 percent distributed among front-of-house and back-of-house employees? Whatever the arrangement is, it needs to be spelled out with percentages."
Renee Erickson's company, Sea Creatures, which owns and operates the Walrus and the Carpenter, the Whale Wins, and Barnacle, includes this rather long, clunky disclosure statement explaining its 18.5 percent service charge on both menus and receipts:
The Washington State Department of Labor requires us to disclose that 59.5% of our service charge is paid to employees 'directly serving the customer.' The remaining amount of the service charge is used to pay all employees a base wage of at least $15 per hour, to further compensate other non-direct service employees on top of their base wage, and it provides health insurance and matching retirement savings accounts to eligible employees.
According to Sea Creatures co-owner Jeremy Price, the company was careful to vet this disclosure statement with lawyers before implementing the service charge on May 1. The extra ink crowding its menus and receipts is a small price to pay for a company that wants to leave no doubt in the minds of its workers and customers that the service charge is directly benefiting employees.
Even though the city included a specific provision about surcharges in its minimum-wage ordinance (largely the result of restaurateurs who asked for it), the city seems woefully unprepared to educate people and enforce its own rules about them. Price said he feels confident that their disclosure statement puts them in compliance with city law, but added, "No one [from the city] has been in contact with us about our statement."
Currently, there is no penalty for a business that does not disclose what percentage of a service charge is paid to employees. According to Bull, a restaurant's failure to provide a disclosure statement would result in "a presumption that 100 percent of the service charge went to the business."
"This is a law being violated left and right across the state," says Marc Cote, an attorney at Seattle law firm Terrell, Marshall, Daudt & Willie. According to Cote, the city and state's disclosure requirements include an implied right of action, meaning that workers could file suit against a restaurant that uses a service charge and doesn't disclose how much of it is paid to workers. "No Washington appellate court has said [that there is an implied right of action]," says Cote, "but three judges in King County Superior Court have found that there is."
In 2014, Cote represented restaurant workers in a class-action lawsuit against Maggiano's Little Italy in Bellevue. “We alleged that the restaurant charged a 20 percent service charge and that the restaurant failed to disclose to customers that the service charge was not going to the employees,” says Cote. A settlement was reached that required Maggiano's to pay $900,000 to its employees.
But, says Cote, "Most restaurant workers don't know about this right that they have." And if workers aren't aware of their rights, restaurants have little incentive to provide disclosure statements.
When asked if there was any motivation for businesses to provide a disclosure statement, Bull replied, "Well, certainly it's the law. But what's the result if somebody doesn't follow the law? Certainly that can be an education campaign that our office can focus on in getting more clarity about what is the recourse." In other words, there's no incentive for businesses to follow the law and no penalty if they don't. (Also, it's worth noting that the Office of Labor Standards has been without an executive director since its inception. The job is still open with no closing date.)
Speaking of education campaigns, certainly the city must have one to educate restaurant owners and workers about service charges? Not so much.
"Right now we're doing our general awareness campaign for minimum wage and for our new wage-theft ordinance," said Bull. "Soon we'll be starting our request-for-proposal process for grants to community organizations who will also conduct worker outreach. That's $1 million over two years. We will also have, for a much smaller amount of money, a request-for-proposal process for organizations to conduct business outreach as well."
Bull is referring to the large portion of the Office of Labor Standards' budget—$300,000 this year, and $700,000 next year—that is set aside for community organizations to educate workers about what to do if they're not getting the wages they're due. But the request-for-proposal process that will begin "soon" is simply the first step by which organizations will apply to get funding to do the work. The real on-the-ground worker-outreach campaign that Bull is talking about won't actually happen for months.
"This service-charge law has been on the books for a while," said Bull. "But it's in the public eye now. Outreach now is just beginning."