In 2022, Washington D.C. voters passed Initiative 82, or the “District of Columbia Tip Credit Elimination Act,” which later became law in February 2023. As we previously reported, the law will gradually phase out the “tip credit” that allows employers to pay tipped employees a lower wage while using gratuities to cover the difference between the lower wage and Washington D.C.’s minimum wage. Under this law, the tip credit is set to be gradually phased out by 2027, at which time employers will be required to pay tipped employees the Washington D.C. minimum wage.
Following passage of the law, the Washington D.C. restaurant industry has seen an uptick in the use of mandatory fees to offset labor costs. Many restaurants have introduced mandatory service charges and other fees for dine-in customers, or have been tacking on processing and packaging fees to carryout orders. But, now, Washington D.C.’s Attorney General, Brian Schwalb, has indicated that restaurants must clearly explain any such fees to their patrons in compliance with the Washington D.C. Consumer Protection Procedures Act (CPPA).
To that end, on August 9, 2023, Washington D.C.’s Attorney General released guidelines reminding restaurants of their legal obligations to properly disclose fees to customers. As part of its guidance, the Attorney General provided several examples of non-compliant disclosures, such as failure to adequately disclose whether a service fee will be used for tips, or if the fee will indirectly support workers by going toward base wages. The guidance further notes that businesses should indicate which portion of the fees will be used for what purposes, if the fees will be used for more than one purpose.
As a result of this guidance, restaurant employers must be prudent that service fee disclosures are not in contravention with the manner in which these fees translate to tip credits for employees. In other words, employers should ensure that they are clearly labeling fees and the precise purpose for each fee, and that the fees correspond with the way employees are provided with tips.
Until the tip credit is fully phased out in 2027, restaurant employers in Washington D.C. may continue to use fees to compensate for increased labor costs, but must do so prudently and in compliance with the CPPA by prominently and adequately disclosing all such fees.