Franchisor Not Liable for Alleged Tips Act Violation by Franchisee

by Robert P. Rudolph

Where the plaintiff employee in Yarph v. Bowden Hospitality Newton LLC, et al. sought to add both the limited liability company that gave a hotel owner a license to do business and the LLC’s parent company to a lawsuit claiming that the hotel violated the Massachusetts Tips Act, the Business Litigation Session of Suffolk Superior Court ruled that the motion to add the franchisor defendants should be dismissed. The Court’s decision was based on the fact that neither entity had any control over or received any revenue from the alleged violation of the Massachusetts Tips Act.

A former employee of the Crowne Plaza Hotel in Newton, Massachusetts claimed the hotel violated the Massachusetts Tips Act by levying an eight percent “administrative charge” for functions where food or alcohol were served, not telling customers that the “administrative charge” was not a tip paid to servers, and keeping the monies collected instead of paying them to wait staff and service bartenders. The employee initially sued Bowden Hospitality Newton LLC (“Bowden”), which owned and operated the hotel. He then moved to amend his complaint and add Holiday Hospitality Franchising, LLC (“HHFL”), the entity that gave Bowden its license to do business as a Crowne Plaza Hotel, and its parent company, Six Continent Hotels, Inc. (“SCH”).

The Massachusetts Tips Act imposes a legal duty on an entity that collects a tip or service charge. The entity must pay the tip or service charge collected to wait staff, service employees and/or service bartenders and may not retain the tip or service charge or distribute it in any manner inconsistent with the Tips Act. An “administrative fee” may only be imposed instead of or in addition to a service charge if the entity informs the customer in writing that the fee does not represent a tip or service charge. If a written disclaimer is not provided to the customer, then the “administrative fee” must be treated as a service charge and distributed to wait staff, service employees and/or service bartenders. Entities that do not collect or retain any part of a tip or service charge have no duty to employees under the Tips Act.

A franchisor is vicariously liable for the conduct of its franchisee only where the franchisor controls, or has a right to control, the specific policy or practice resulting in harm to the plaintiff. The Court held that the mere fact that HHFL received payments under its license agreement with Bowden did not make it liable for Bowden’s alleged violation of the Tips Act. Nothing in the statute imposes liability on franchisors or licensors that receive royalties paid from general net revenue of a hotel or other business that collects a service charge.

HHFL and SCH asserted that the employee had no standing to sue them. The Court found that HHFL and SCH did not own, operate, or control the hotel where the employee worked. They did not assess or collect any of the “administrative fee” at issue. They never told Bowden what or how to bill for its banquet and event services, nor did they have a right to do so. They had no control over whether and how Bowden assessed an “administrative fee” for its banquets and functions. And possibly most importantly, the Court found that neither HHFL nor SCH received any part of the revenue generated by Bowden’s alleged “administrative fee” or other revenue from banquet, event or function services. Based on those findings, the Court ruled that neither HHFL nor SCH ever owed the employee any duty under the Massachusetts Tips Act and, therefore, the employee lacked standing to assert claims against those two corporate entities.

This matter provides a lesson for both restaurant owners and diners alike. If you are a restaurant owner and charge an “administrative fee,” be sure that the “administrative fee” is properly disclosed to guests. If you are dining out, make sure you know who is entitled to receive a portion of the various line items on your check – tip, service charge and/or administrative fee.