Gratuity Included: The Timothy Brown Class Action

Restaurants banning tipping and transitioning to “gratuity included” pricing is not a new concept. While such arrangements rarely last, from time-to-time news breaks of avant-garde restaurateurs who attempt to throw off the tipping yoke, and launch eateries where management (and not patrons) have control over staff compensation leading (in theory) to a more equitable workplace. The thought process is that gratuities left to wait staff, even in establishments that engage in some form of tip pooling, are rarely distributed “fairly” to the important people who work in the kitchen, clear the tables, and take the reservations. The solution? Mark-up menu prices by 20% and pay all staff a living wage.

This solution sounds nice, but the industry to date has struggled to successfully implement it. The truth is that in North America tipping is ingrained in the psyche of both patrons and wait staff; it’s a significant social convention that is not easily altered. The economics of the practice are also important to consider. Most bars and restaurants take for granted that they can pay their floor staff minimum wage, and in many jurisdictions, including British Columbia,  legislation allows for a lower minimum wage for those that sell alcohol. Paradoxically, most bars and restaurants attempt (as best as they can) to employ attractive, educated and charismatic individuals – the very same type of people who try and avoid working for minimum wage when they can. Here gratuities bridge the gap that would otherwise exist between ownership’s downward pressure on staffing costs, and the public’s desire to be waited on by motivated and knowledgeable servers and bartenders. Put more simply, the kind of people you want waiting on you are willing to work for minimum wage because the upside of collecting tips in cash each night makes it worth their while. Take that upside away, and those individuals will look for better remuneration in other lines of work.

The “gratuity included” model attempts to rework this long-standing framework by marking-up all menu items under the premise that the mark-up will be carved off from the general revenue of the restaurant and then redistributed equitably amongst the staff by benevolent management. To work, patrons are required to accept inflated prices and relinquish the control they have over their choice to leave a tip. Similarly, restaurant staff have to believe that management can be trusted to collect, account, and distribute the “gratuity included” portion of the establishment’s revenue in a manner that is more just than under the traditional regime. For kitchen staff this model is appealing, as they are largely excluded from meaningful sharing in tip money; for floor staff this model invariably results in reduced income.

In addition to the social and economic considerations set out above, there also exists a variety of legal and tax implications to both regimes. A fulsome discussion of the nuanced world of tipping, and the legalities of the same, would greatly exceed the scope of this article. Suffice it to say, establishing and maintaining a “gratuity included” restaurant is difficult to do; many have tried, few have succeeded. But what if a bunch of restaurants in the same city all made the transition at once? What if, by express agreement, a series of restauranteurs got together and decided that they would all simultaneously move to a gratuity-included business model, reducing the ability of staff and patrons to take their labour and patronage to businesses operating under the traditional model?

On October 6, 2017 Timothy Brown alleged just that in a class action proceeding commenced in the District of Northern California under the style of proceeding Brown v. 140 NM LLC and others.

In his class action complaint Brown alleges that the defendants, being a “handful of Bay Area restaurants” and a group of a New York City restaurants, “are engaged in a sophisticated unlawful conspiracy” to interfere with the “private transaction” that occurs between the customer and the server that generates “tips” which become the legal property of the server/employee receiving them. Importantly, Brown isn’t alleging that this conspiracy exists amongst a group of small or sketchy establishments, rather he says the conspiracy includes some of the biggest hitters in the industry including the Union Square Hospitality Group (think Michelin-starred Grammercy Tavern) and restaurants such as Momofuko, owned by celebrity chef David Chang.

The facts, says Brown, are these: every year American consumers freely and voluntarily give over 40 billion dollars in tips to the nation’s approximately three million waiters, waitresses and bartenders. Beginning in 2014 Union Square Hospitality Group founder and CEO Danny Meyer hatched a conspiracy whereby “best practices” for switching to a no-tipping, hospitality included, business model would be developed and disseminated amongst the conspirators.

The evidence of the conspiracy, alleges Brown, can be found everywhere from Twitter messages, to news articles, to panelist commentary and survey results. Taken as a whole, this body of “evidence”, which is set out in the class action complaint itself, leads to the conclusion that the named defendants have conspired to fix restaurant prices.

This conspiracy, which Brown says is still in the experimental stage, unlawfully transfers millions of dollars from customers and servers to restaurant owners in violation of federal and state antitrust laws. Though portrayed, by the conspirators, as a movement to promote social justice and equality in the service industry, Brown alleges that the real aim is to effect a greater profit by ownership at the expense of workers and consumers.

A violation of antitrust law?

Antitrust law prohibits concerted action that unreasonably restrains competition.

Brown acknowledges that restaurants are of course at liberty to on an individual basis increase their prices, ban tipping, or both. Such unilateral action, for the reasons discussed above, is difficult to sustain because the resultant loss in customers and staff to competitors renders the change unprofitable. This challenge can be avoided if restaurants conspire to engage in price-fixing, an unlawful business practice that constitutes unfair competition.

So where does Brown fit in all of this? Brown says that he, and a putative class of consumers, who have eaten in the restaurants operated by the defendants have been overcharged as a result of the price-fixing/no-tipping conspiracy and are entitled to damages for the same.

The lawsuit, not even two weeks old, has attracted considerable media attention on both sides of the border. To Alcohol & Advocacy’s knowledge the defendants have yet to file formal responses.

Like other American class-action litigation discussed here at Alcohol & Advocacy, this lawsuit offers food for thought at best, and little by way of merit or legal precedent. That said, existing and aspiring restaurateurs considering adopting a “gratuity included” pricing model would be wise to contact their legal and tax advisors to ensure they do not end up on the wrong end of a lawsuit, or employment tribunal complaint.

If your business has questions about the issues raised in this article, or British Columbia’s liquor and hospitality laws generally, contact Dan Coles at Owen Bird.

*Alcohol & Advocacy publishes articles for information purposes only. They are not a substitute for legal advice, and persons requiring such advice should consult legal counsel.

Dan Coles
Retired bartender. Young lawyer. From the East, living in the West. Interested in British Columbia's producers and purveyors of wine, beer and spirits.