Some Hawaii hotels and restaurants have placed themselves at financial risk by ignoring a 13-year-old state law requiring that service charges be passed on to their employees as tips. The state Supreme Court this week upheld the applicability of that law for pending lawsuits, paving the way for employees to pursue and collect past gratuities. The hold-out hotels should prepare to pay workers their rightful share to end the legal battle.

Numerous hotels appear to have ignored a 2000 Hawaii law that hotels and restaurants must distribute “service charge” proceeds directly to their employees as “tip income” on top of food or beverage prices. They have rebuffed employees’ lawsuits to recover income by maintaining that since the statute was established under consumer protection instead of labor law, the workers could not sue. They maintained tips are not recognized as salary by some unions because they are not included in determining union dues. Those are weak arguments.

Now that the lawsuits can proceed, the result could amount to millions of dollars in compensation to employees, including through their labor unions. In cases in Massachusetts, which has a similar law, dozens of establishments have been sued for violation, including a resort that reached a $7 million settlement with about 700 current and former workers. In New York, nearly all restaurateurs have settled similar cases while denying wrongdoing rather than going to trial.

Several Hawaii hotels that had been taking a percentage of service fees without notification to customers settled cases by employees or their unions following the law’s enactment. This was the proper course of action. Other hotels, however, contested workers’ legal grounds for suing for their “service charge” pay. The state Supreme Court’s interpretation of the state law was requested by U.S. District Judge Helen Gillmor, the assigned judge in a class-action lawsuit against hotels.

“We contend that service charges must be paid to employees,” said Shannon Liss-Riordan, an attorney with cases against Four Seasons, Ritz Carlton, Grand Wailea and Starwood-branded Hawaii hotels. “When patrons pay service charges, it looks like gratuity and then they don’t tip.”

Attorney Jim Bickerton said he has at least six cases pending against major hotel companies on behalf of employees or, in one case, consumers who objected to what they call a lack of transparency in billing by the hotels. He says Hawaii hotels pocket as much as one-fifth to one-sixth of all service charges.

Former Fairmont Orchid employee Nick Bonar, a Bickerton client, told the Star-Advertiser’s
Allison Schaefers that he received $8,000 after finding it “disheartening” to learn that the hotel was “taking a portion of the service and not telling consumers.”

Bickerton said some hotels, including Sheraton Waikiki, have been compliant with the 2000 law since court cases began. Other hotels who have balked, however, should heed warnings that plaintiffs could get double awards in their attempts to recoup company-pocketed service charges paid by consumers who thought they were tipping workers.