41 Cal.App.5th 771
Cal. Ct. App.2019Background
- Plaintiff Lauren O’Grady, a banquet server/bartender at the Julia Morgan Ballroom, sued on behalf of non-managerial banquet service employees.
- Defendant Merchant Exchange Productions automatically added a 21% mandatory "service charge" to every banquet bill.
- Plaintiff alleges portions of those service charges were retained by defendant or distributed to managers/non-service employees, rather than to the non-managerial servers.
- Claims: violation of Labor Code §351 (gratuities), UCL restitution, intentional interference with prospective economic advantage, breach of implied contract, and unjust enrichment/restitution.
- Trial court sustained defendant’s general demurrer without leave to amend, relying on Searle and Garcia to hold mandatory service charges are never gratuities; Court of Appeal reversed, holding no categorical rule bars treating a service charge as a gratuity.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Can a mandatory "service charge" be a "gratuity" under Cal. Labor Code §§350–351? | The service charge was presented and reasonably perceived as a gratuity for service staff and therefore is the employees' property under §351. | Searle and Garcia establish as a matter of law that mandatory service charges are part of the amount due the business, not gratuities. | The court held there is no categorical prohibition; a service charge may be a gratuity depending on context; demurrer improperly sustained. |
| Do Searle and Garcia preclude plaintiff’s §351-based claim as settled law? | Those precedents are distinguishable and do not bar a §351 claim where the complaint alleges customers intended the charge as a gratuity and the employer misappropriated it. | Those cases control and show mandatory service charges are not gratuities, so plaintiff’s claims fail as a matter of law. | The court declined to treat Searle/Garcia as controlling in all circumstances and refused to accept a blanket rule that service charges can never be gratuities. |
| Are plaintiff’s other claims (intentional interference, implied contract, unjust enrichment/restitution) viable if the gratuity theory is plausible? | Wrongful retention or misdirection of funds that customers intended for service employees supports interference, implied contract, and restitution remedies. | If the service charge is not a gratuity, the predicate for these claims fails. | The court held plaintiff alleged sufficient wrongful conduct to support those causes of action (labels not dispositive); unjust enrichment may be pursued as restitution. |
Key Cases Cited
- Searle v. Wyndham Internat., Inc., 102 Cal.App.4th 1327 (Cal. Ct. App. 2002) (upheld mandatory room‑service charge practice and observed that a mandatory service charge may not be treated as a patron’s gratuity in all contexts).
- Garcia v. Four Points Sheraton LAX, 188 Cal.App.4th 364 (Cal. Ct. App. 2010) (upheld municipal ordinance treating certain hotel service charges as payable to workers and rejected hotel preemption arguments).
- Leighton v. Old Heidelberg, Ltd., 219 Cal.App.3d 1062 (Cal. Ct. App. 1990) (early tip‑pool precedent framing patron intent and gratuity issues).
- Chau v. Starbucks Corp., 174 Cal.App.4th 688 (Cal. Ct. App. 2009) (describes collective tipping and courts’ willingness to infer patrons’ intent for pooled gratuities).
- Lu v. Hawaiian Gardens Casino, Inc., 50 Cal.4th 592 (Cal. 2010) (Supreme Court recognized employees’ remedies for misappropriated gratuities and availability of other remedies such as conversion/restitution).