• Ordinance that Requires Nonunionized Hotels to Pass Along Mandatory Service Charges to Workers Is Neither Preempted By the Labor Code nor Unconstitutional
  • October 6, 2010 | Author: Mona Ebrahimi
  • Law Firm: Kronick Moskovitz Tiedemann & Girard A Law Corporation - Sacramento Office
  • In Garcia v. Four Points Sheraton LAX, (--- Cal.Rptr.3d ----, Cal.App. 2 Dist., September 8, 2010), a court of appeal considered whether an ordinance passed by the City of Los Angeles (“City”) that requires certain nonunionized hotels to pass along mandatory service charges to the workers who render the services for which the hotel is collecting the charges is preempted by the Labor Code or unconstitutional. The court of appeal held that the ordinance is not preempted by the Labor Code and is also not unconstitutional.

    City enacted the Hotel Service Charge Reform Ordinance (“Ordinance”) in 2006 in an effort to increase the compensation of workers who perform services at nonunionized hotels located near the Los Angeles International Airport (“LAX”). The Ordinance provides that if a hotel has 50 or more rooms within the Gateway to Los Angeles Property Business Improvement District (“Century Corridor”), which is adjacent to LAX, the hotel must “pass along service charges to those hotel workers who render the services for which the charges are collected.”

    Banquet captains and servers at hotels within the Century Corridor filed a class action lawsuit against various hotels alleging violations of the Ordinance and unfair competition laws. The hotels asked the trial court to dismiss the lawsuit on the ground that the Ordinance is preempted by Labor Code provisions which regulate gratuities and is unconstitutional because it violates both the California and United States Constitutions. The trial court found in favor of the hotels on the ground that the Labor Code preempts the Ordinance.

    The court of appeal reversed the decision of the trial court. The court of appeal first found that the Labor Code does not preempt the Ordinance. Labor Code section 351 prohibits an employer from taking any gratuity from its employees. A “gratuity” is defined by Labor Code section 351 as “any tip, gratuity, money, or part thereof that has been paid or given to or left for an employee by a patron of a business over and above the actual amount due the business for services rendered or for goods, food, drink, or articles sold or served to the patron.” An employer may not use gratuities to satisfy wage obligations.

    The Ordinance provides that hotels subject to its provisions may not retain services charges and those charges must “be paid in the entirety by the Hotel Employer to the Hotel Worker(s) performing services for the customers from whom the Service Charges are collected.” When a hotel charges a service charge for a catered meeting or banquet, the charges must “be paid equally to the Hotel Workers who actually work the banquet or catered meeting.” If the hotel collects a service charge for room service or porterage service, the money collected must be paid to the worker who delivered the food or beverage or who carried the baggage. The Ordinance excludes “[g]ratuities and tips left by customers for a hotel worker.”

    The Ordinance recognizes that workers at hotels in the targeted area have low hourly wages and therefore, rely on gratuities. LAX-area hotels have instituted mandatory service charges of 15% to 20% for large group events and banquets. As a result, “Hotel patrons assume the service charges are paid to the workers performing the services, and therefore the patrons reduce or eliminate gratuities.” Although some hotels pay a portion of the service charges collected to the employees, other hotels do not.

    The court found a service charge is not a gratuity within the meaning of the Labor Code. The Ordinance does not contradict the Labor Code because not only do the two laws address different subjects, they also attempt to prevent different harms. “The Labor Code attempts to prevent fraud on the public in connection with the practice of tipping to ensure employees receive the tips left for them by the patron.” The Ordinance, on the other hand, “addresses certain hotels’ business practices of pricing services based upon two components—a base price and a surcharge, designated as a ‘service charge,’” which “is not negotiable and is part of the amount the patron must pay for the services.” Pursuant to the Ordinance, a hotel must pay the service charge to the employee. The court concluded that “the Ordinance does not prohibit what the Labor Code commands or command what it prohibits.”

    The court further found the Ordinance is not unconstitutional. The hotels asserted the Ordinance “violates the guarantees of equal protection because it (1) singles out hotels within the Corridor and does not apply to other LAX-area hotels; (2) does not cover hotels with less than 50 rooms; and (3) exempts unionized hotels within the Corridor.” The court rejected these arguments finding that all three limitations are rational. The court further found the Ordinance does not violate due process and is not vague. Finally, the court held that the Ordinance is not an economic regulation that takes private property for public use.