They may have been flouting a directive from the Internal Revenue Service. As far back as Jan. 1, 2014, the IRS put into effect a June 2012 ruling that restaurants could no longer apply an automatic gratuity -- typically 18 percent -- to the check for parties of eight diners or more. Tipping was supposed to be entirely discretionary. According to LVA intelligence, some Vegas venues were stamping diners’ checks with messages to the effect that the amount of the tip is up to you.
However … there is a loophole. A big one. If the gratuity is classified as a "service charge," it can still be hit with that 18% whammy. This is usually imposed on parties of eight or more. According to Barran Liebman Attorneys, "Compulsory service charges added to bills are not voluntary (the patron does not have the unrestricted ability to determine whether to pay anything and, if so, how much); therefore, they are not tips, even if distributed to employees. The distinction is important because the designation of mandatory gratuities as wages rather than tips will have employment-tax repercussions. Tips are the property of the employees who receive them, and cannot be used by the employer for any purpose that is not statutorily permitted by the Fair Labor Standards Act. Conversely, service charges are gross receipts of the employer, and the employer is free to use them however it sees fit."
Adds the Kielich Law Firm, "The rules being enforced by the IRS are not new; they are actually based on existing Department of Labor regulations for tipped employees. The IRS has just clarified how it will enforce the rules from a tax perspective going forward." One of the clarifications is that mandatory gratuities passed on to employees must count as wages, not tips, per Department of Labor precedent. Since payroll taxes must now be paid (not to mention sales taxes), one would think that would be a disincentive for restaurants to impose compulsory gratuities.
This "service charge" rule may also make restaurants more reluctant to have staff work overtime. According to Kelich, "you can also be awarded attorney fees and court costs for winning on a claim for unpaid overtime." Since restaurants can treat service charges as income, this may help explain their reluctance to let go of them, regardless of the higher wages that come with them.
On the other hand, some wait staff welcome the change. New York restaurateur Sara Jenkins said her servers would prefer to receive tips, which ranged as high as 22%, compared to the 18% ceiling on service charges. She added that her overseas customers were stiffs: "They tip 7% and it seems like a great tip to them." Other servers resent the change because it means withholding tax will be applied to the additional income. Some companies, like Texas Roadhouse, have phased out service charges entirely. However, as you have experienced, the practice is alive and well in Las Vegas.
