Service charge vs. tip: What’s the difference?

(NEXSTAR) – As restaurants feel pressure to add surcharges to diners’ tabs to make ends meet, you may see a few unfamiliar fees on your next bill.

It might be labeled a “living wage fee,” which helps the restaurant better pay staff that don’t traditionally receive tips. Some businesses have added a health care surcharge to help cover the cost of offering employees benefits. Some restaurants added service charges to cover COVID-related costs, such as PPE. More rarely you might encounter something like a carbon offset fee.

“Any non-discretionary charge added to a restaurant or bar customer’s bill, regardless of what it’s called, is a service charge,” explained Denise Mickelsen, communication director with the Colorado Restaurant Association and Foundation.

While these charges add some percentage extra on top of your bill, these are usually not the same as tips or gratuities.

“Because service charges are considered revenue, they can be allocated to employees as operators see fit; they do not count towards the tip credit,” Mickelsen said. “Tips, on the other hand, are non-compulsory gifts given from patrons directly to employees.”

In most cases, a service charge is not a replacement for a tip. If it is, like in the case of an auto-gratuity, that will be explicitly explained on the menu or the check.

When in doubt, read the fine print, or ask your server.

“Service charges typically appear on a customer’s bill with a brief explanation of the purpose of the charge – i.e., to replace tipping, add to back-of-house wages, or offset expenses, depending on the circumstance – and the amount or percentage of the charge. Some restaurants also post signage at tables or on menus to communicate their approach to service charges, and train their customer-facing staff members to explain the reasoning behind the service charges,” Mickelsen said.

While the proliferation of surcharges is understandably frustrating for diners, restaurant owners say it shouldn’t be seen as a cash grab. More likely, it’s a way they’re trying to cope with a tough economy and the industry’s slim profit margins.

Graham Painter recently told the New York Times he had to implement a 22% surcharge at his Houston restaurant Street to Kitchen. “If we didn’t have the service charge, we might be out of business in a couple weeks,” Painter said.

“Restaurants are not money-makers and the people who run them are doing so because they love to serve and care about hospitality,” Mickelsen. “When guests see a service charge on their bill, they should know that the cost of doing business right now is higher than ever before and those service charges are a means of staying in business. “