With Maine’s minimum wage about to rise significantly, some restaurant owners in the state are looking at alternatives to tipping to provide their servers with a higher hourly base pay. But state officials warn that an unusual labor law in Maine – with rare exception – prohibits eateries from adding a service charge to customers’ bills in lieu of tips.

At least three restaurants in Maine have discovered the obscure law after trying to replace tips with service charges. According to a state restaurant industry official, Maine is the only state in the U.S. that places restrictions on such surcharges at restaurants.

At the heart of the matter is a state law that allows service charges in lieu of tips, but only at private clubs or banquet facilities. For all other establishments, service charges cannot be collected, pooled and divided up among staff as is allowed in other states.

Amy Alward, owner of Baristas and Bites at 469 Fore St. in Portland, unwittingly ran afoul of the law. She said she wanted the recently opened eatery to be able to provide better compensation to its workers, including a starting wage of $15 an hour for full-time staff and benefits such as a 401(k) plan, paid time off and health insurance.

At the same time, Alward wanted to keep the grab-and-go restaurant’s prices low, such as $1 for an espresso. The solution she came up with was to add a service charge of about 12 percent to customer orders and eliminate tipping.

“I love that whole model in Europe where they just do a service fee,” she said. “We’ve only had two people complain about the service fee.”

Alward said she even consulted with an attorney, who told her the service charge was legal.

“A lawyer called me. He saw an article (about the restaurant),” she said. “He said you want to make sure you call it a service fee.”

The lawyer had been referring to an early article about Baristas and Bites in which Alward had been quoted as calling the surcharge a “cost of living fee.” He told her it was important to call it a service fee. But according to Maine officials, it’s illegal no matter what you call it.

“It sounds like I need to talk to the Department of Labor,” Alward said.

The law in question, section 2-B of Maine’s minimum wage statute, reads: “An employer in a banquet or private club setting that adds a service charge shall notify the customer that the service charge does not represent a tip for service employees. The employer in a banquet or private club setting may use some or all of any service charge to meet its obligation to compensate all employees at the rate required by this section.”

Although the state law does not expressly prohibit businesses other than banquet halls and private clubs from adding service charges, Maine Department of Labor spokeswoman Julie Rabinowitz said the law is widely regarded as a prohibition on service charges in all other types of eating establishments.

“Generally, this statute is interpreted to restrict service fees to a banquet hall or club,” she said. “Now, does a restaurant that has a room you can reserve for a private or group function also then count as a banquet hall? This is the gray area in the law.”

CHANGING COMPENSATION

Two things are happening in Maine that are likely to push more restaurant owners to consider alternatives to standard tipping.

A new law approved by voter initiative in November raises Maine’s statewide hourly minimum wage from the current $7.50 to $9 in 2017, followed by annual $1 increases until it reaches $12 in 2020. Future increases will be indexed to inflation.

It also increases the minimum hourly employer-paid cash wage for workers who rely on tips from the current $3.75 to $5 in 2017, followed by annual $1 increases until it reaches the full minimum wage of $12 in 2024. The law accomplishes this by gradually ratcheting down the state’s “tip credit,” a discount on minimum hourly cash pay afforded to employers whose workers receive tips.

Leaders of Maine’s restaurant industry have warned that unless restaurant owners find a way to boost their revenue, they may be unable to remain profitable while meeting their obligations under the new law. Some are considering raising menu prices to compensate.

But state officials said adding a service charge is not a viable solution in Maine.

Rabinowitz said the state’s prohibition on restaurant surcharges is so unusual that many restaurant experts, particularly those from other states, aren’t aware of it.

“The federal Fair Labor Standards Act has no such restriction, which is why restaurateurs/chefs who have worked in other states and are now operating in Maine are under the impression that this is a reasonable and legal way to augment their revenue to cover the higher labor costs associated with the increase for both the minimum wage, the direct wage/tip credit and the increase for salaried workers, as well as associated payroll-related costs,” Rabinowitz said.

Chris Peterman, director of operations for Bao Bao Dumpling House at 133 Spring St. in Portland and Tao Yuan at 22 Pleasant St. in Brunswick, ran into the same issue after the two restaurants decided to eliminate tipping and implement a service charge on Dec. 1.

Like Alward, Peterman and chef Cara Stadler were looking for a way to better compensate workers while avoiding the sticker shock associated with jacking up menu prices. They decided an 18 percent service charge was the best solution.

“At first, we thought it would be easier for people to understand if it was a line item on a check,” Peterman said.

However, he said they soon learned that adding a service charge would put them on the wrong side of Maine labor law.

“Federal law says you can do whatever you want, but state law says you can’t,” Peterman said. “We had our lawyers look into it. There’s no wording you can use (to make a surcharge legal in Maine).”

A work-around

However, the legal finding did not deter Stadler and Peterman. They set aside their concerns about price increases and added 18 percent to the price of each menu item. Servers and bartenders now inform customers about the reason for the increase, and the elimination of tipping, when they deliver their checks at the end of a meal.

“Customers, I would say about 90 percent are interested and get it and think it’s a good idea,” Peterman said.

Among them was Jordan Alise Nyberg, an event coordinator at Wesleyan University, who posted on Facebook that she loved that Bao Bao pays its servers a decent wage with benefits.

“Our waitress, Delilah, was so amazing we opted to tip her in addition to what was on the bill already,” posted Nyberg.

Another diner, Greg Burbank of Smithfield, Rhode Island, said he liked the no-tipping policy so much he was going to leave a tip anyway.

Some left negative comments about the new policy, with one man wondering if removing tips removed an incentive for servers to work harder, but the positive comments on Facebook outweighed the negative.

After learning about the service charge prohibition in Maine, Alward said she plans to adopt a similar strategy to the one at Bao Bao and Tao Yuan. She said she will raise prices on meals such as sandwiches and rotisserie chicken dinners while leaving coffee prices the same, such as the $1 espresso.

“We’re just going to turn around and change our pricing for now,” she said.

Steve Hewins, president and CEO of the Maine Restaurant Association, noted that restaurants can implement an occasional service charge, such as for large parties, as long as the money goes directly to the servers who waited on that particular group. What they can’t do under Maine law is pool the money and use it to pay other workers, unless they run a banquet hall or private club.

“You can add a service charge to a bill, but you have to give it 100 percent to the server,” he said.

Hewins said the law regarding service charges would need to be changed by the Legislature before Maine’s restaurant industry could transition from tip-based compensation to the European system based on service charges envisioned by Alward. He said it’s a change the restaurant association might get behind in the future, but for now it is more concerned about lobbying state lawmakers to reinstate the tip credit.

Hewins said he believes that’s the best way to keep Maine restaurants thriving. He said he expects to see multiple bills proposed in the upcoming legislative session to bring back the tip credit.

“You could announce no tipping and that sort of thing, but then you’re going to lose a lot of your servers,” he said.

But Peterman said that since Bao Bao and Tao Yuan eliminated tipping, they have only lost two servers at each location. Most are happy with the change to a higher starting base pay of $15 to $17 an hour and appreciate the stability that comes with a regular paycheck. Customers still can leave cash tips, but there is no tip line for those paying by credit or debit card.

He said the two restaurants will not go back to the old system of servers relying on tips to earn a decent wage even if the tip credit is reinstated.

“We decided to implement this long before there was a buzz about higher minimum wage or eliminating the tip credit,” Peterman said. “We’re absolutely committed to this.”