A service charge is not a gratuity, and saying so is your job

Nearly every catering contract has a line on it somewhere between 18 and 22 per cent labelled "service charge". Ask ten customers what it is for and most will tell you it goes to the staff. Ask ten caterers and most will tell you it covers the cost of putting staff on site, insurance, vans and the coordinator's time.

Both answers are common. Only one of them is on the invoice, and it usually is not.

Why the distinction is not pedantic

A mandatory charge that the customer cannot refuse is, in most treatments, revenue of the business. A voluntary amount the customer chooses to add is a tip and belongs to the staff. That difference shows up in at least four places:

Wage law. Whether the money can count toward what staff are paid, and whether it can be pooled, depends on which of the two it is.

Sales tax. Several states tax a mandatory service charge and do not tax a voluntary gratuity, precisely because one is a sale and the other is not. Some tax neither. Some tax the service charge only when it is charged alongside taxable food.

Disclosure rules. A number of jurisdictions require a mandatory charge to be disclosed clearly and, in some cases, to say explicitly whether it is distributed to staff.

What the customer does next. Somebody who believes the 20 per cent went to the staff will not tip on top. Somebody who is told plainly that it did not, often will.

The wording that avoids the argument

The problem is almost never the amount. It is that the line says "Service charge — 20%" and nothing else, so the customer fills in the meaning themselves and finds out at the end of the evening that they were wrong.

Two sentences fix it, and they belong on the quote rather than in a paragraph of terms nobody opens:

A mandatory service charge that stays with the business: "This covers staffing, coordination, insurance and equipment. It is not a gratuity and is not distributed to staff. Any gratuity is at your discretion."

A charge that is distributed: "This is distributed in full to the staff working your event." If you say that, be able to show it, because in several states that sentence creates an obligation.

Where caterers get caught

The three patterns that recur:

One line doing two jobs. A single 22 per cent that is part operating cost and part staff money. It is neither cleanly, and it is very hard to defend later. Two lines is not more paperwork; it is less.

The word "gratuity" used for a mandatory charge. The safest assumption is that if you call it a gratuity, somebody will hold you to it being one.

Tax applied to the wrong one. If your state taxes mandatory charges but not voluntary tips, and both are in the same line, the line is wrong whichever way you treat it.

What to actually do

Ask your attorney or your CPA two questions once: is a mandatory service charge taxable in this state, and what do we have to disclose about where it goes. Then put the answer in the wording on every quote and stop rewriting it.