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O’Grady v. Merchant Exchange Productions, Inc.

California Court of Appeals, First District, Second Division

October 31, 2019

Lauren O’GRADY, Plaintiff and Appellant,

         [254 Cal.Rptr.3d 495] Trial Court: San Francisco County Superior Court, Trial Judge: Honorable Harold E. Kahn (San Francisco County Super. Ct. No. CGC-15-547796)


         Attorney for Plaintiff and Appellant: Lichten & Liss-Riordan, Michael Freedman, Matthew D. Carlson, Shannon Liss-Riordan.

         Attorney for Defendant and Respondent: Littler Mendelson, P.C., Joseph A. Schwachter, Galen M. Lichtenstein.


         Richman, Acting P.J.

Page 772

          An employer is in the business of providing a banquet facility at which food and beverages are served. The employer adds a mandatory, and substantial, "service charge" to the contract for every banquet. The employer distributes some of the service charge to managerial employees who do not serve food and beverages at the banquet. An employee

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filed a putative class action to force the employer to treat the service charge as a gratuity and distribute all of it to employees who do serve food and beverages at the banquet. The employer took the position that two Court of Appeal opinions hold, as a matter of law under stare decisis, that a service charge can never be a gratuity. The trial court agreed, and sustained the employer’s general demurrer without leave to amend.

         The issue presented here is whether the "service charge" may be a "gratuity" that Labor Code section 351[1] requires to go only to the non-managerial employees involved with the actual serving of the food and beverages. We conclude there is no categorical prohibition why what is called a service charge cannot also meet the statutory definition of a gratuity, and thus we reverse.


          Plaintiff Lauren O’Grady describes herself in her complaint as "a banquet server and bartender at the Julia Morgan Ballroom" in San Francisco that is owned and operated by defendant Merchant Exchange Productions, Inc. Plaintiff brought [254 Cal.Rptr.3d 496] this putative class action for herself "and on behalf of all others similarly situated, namely all other non-managerial food and beverage banquet service employees who have worked at the Julia Morgan Ballroom."

         The object of the action was defendant’s practice of automatically imposing a 21 percent "service charge" to every food and beverage banquet bill. According to plaintiff, part of the monies collected as service charges are kept by defendant, with the rest distributed by defendant to "managers and other non-service employees." Plaintiff alleged that the service charge constituted a gratuity, but defendant has "failed to distribute the total proceeds of [these] gratuities to non-managerial banquet service employees" as required by California law, and thus defendant’s practice "violates" section 351.

          The totality of plaintiff’s factual allegations (omitting only paragraph numbers) read as follows: "At the Julia Morgan Ballroom, Defendant has routinely added a 21% service charge to its food and beverage banquet bills. [¶] These service charges have been in the form of automatic charges which customers are required to pay, and which reasonably appear to be gratuities for the service staff. [¶] It is typical and customary in the hospitality industry that establishments impose gratuity charges in the range of 18-22% of the food and beverage bill. [¶] Thus, when customers have paid these charges, it is reasonable for them to have believed they were gratuities to be paid to the service staff. [¶] Indeed, because of the way these charges are depicted to

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customers, and the custom in the food and beverage industry that gratuities in the range of 18-22% are paid for food and beverage service, customers have paid these charges reasonably believing they were to be remitted to the service staff. [¶] However, the defendant has not remitted the total proceeds of these gratuities to the non-managerial employees who serve the food and beverages. [¶] Instead, the defendant has had a policy and practice of retaining for itself a portion of these gratuities and/or using a portion of these gratuities to pay managers or other non-service employees."

          Defendant’s service charge practice was alleged to support the following causes of action:

          "COUNT I

          "Statutory Gratuity Violation

         "Defendant’s conduct, as set forth above, in failing to remit to non-managerial banquet service employees the total proceeds of gratuities added to banquet customers’ bills constitutes a violation of California Labor Code � 351. This violation is enforceable pursuant to the California Unfair Competition Law, Cal. Bus. & Prof. Code � 17200 et seq (UCL). Defendant’s conduct constitutes unlawful, unfair, or fraudulent business acts or practices in that Defendant has violated California Labor Code � 351 in not remitting to the non-managerial service employees the total gratuities that are charged to customers. As a result of Defendant’s conduct, Plaintiff and class members suffered injury in fact and lost money and property, including the loss of gratuities to which they were entitled. Pursuant to California Business and Professions Code � 17203, Plaintiff and class members seek declaratory and injunctive relief ... and to recover restitution....[2]

         [254 Cal.Rptr.3d 497] "COUNT II

          "Intentional Interference with Advantageous Relations

          "The Defendant’s conduct as set forth above in failing to remit the total proceeds of gratuities added to banquet bills to non-managerial service

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employees who have worked in the defendant’s banquet department constitutes unlawful intentional interference with the advantageous relationships that exist between these employees and the defendant’s customers under state law.

          "COUNT III

          "Breach of Implied Contract

          "The Defendant’s conduct as set forth above constitutes breach of implied contract under state law. The defendant has breached an implied contract with its customers that the employees would receive the proceeds of the gratuities, for which the service employees are third party beneficiaries.

          "COUNT IV

          "Unjust Enrichment

          "The Defendant’s conduct as set forth above constitutes unjust enrichment under state common law."

         As noted, defendant interposed a general demurrer, and explained its objection to each of plaintiff’s causes of action as follows: By reason of Searle v. Wyndham Internat., Inc. (2002) 102 Cal.App.4th 1327, 126 Cal.Rptr.2d 231 (Searle ) and Garcia v. Four Points Sheraton LAX (2010) 188 Cal.App.4th 364, 115 Cal.Rptr.3d 685');">115 Cal.Rptr.3d 685 (Garcia ), "Plaintiff fails to state a [cause of action] because a mandatory service charge which is automatically added to a customer’s bill and which a customer is required to pay, is not a gratuity as a matter of law ." (Italics added.) Defendant elaborated: "Simply put, each of the four causes of action in the Complaint is predicated on a claim that is contrary to California law— specifically that the mandatory service charges Defendant adds to customers’ bills are gratuities that must be distributed to its servers. But, as a matter of settled California law, mandatory service charges, such as those alleged to have been charged by Defendant, are not gratuities, and thus need not be disseminated to employees as required for tips and other gratuities. [Citations.] Accordingly, none of the causes in the Complaint states facts sufficient to constitute a valid cause of action.... Further, because the critical flaw in Plaintiff’s Complaint cannot be cured by amendment, Defendant submits that the Complaint must be dismissed without leave to amend." (Fns. omitted.)

         The trial court heard argument on whether Searle and Garcia — identified by the demurrer as the "settled California law"— did indeed foreclose liability. Concluding "I have no choice but to follow Garcia and Searle ," the court

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determined defendant was not violating section 351. Accepting defendant’s argument that the alleged statutory violation was the predicate for each of plaintiff’s causes of action, the trial court sustained defendant’s general demurrer to the entire complaint. Plaintiff appeals from that ruling.[3]

         [254 Cal.Rptr.3d 498] In our original opinion, which was not certified for publication, we reversed. Defendant filed a petition for rehearing, raising a number of points. We also received a letter from the Labor Commissioner advising that the issue of whether a service charge may be deemed a gratuity for purposes of section 351 is a matter of "significant importance to service workers" and "continuing public interest," warranting publication of the opinion. We granted rehearing to examine the issue more fully.


          Stand ...

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