Here is the sentence that answers the question "who keeps the service charge at restaurants" in federal law, from Department of Labor regulation 29 CFR 531.55: a compulsory charge for service, imposed on a customer by the employer's establishment, is not a tip. That is the entire legal test. If the restaurant set the number, the number belongs to the restaurant. Square's payment data puts a number on how often this shows up: about 3.7 percent of restaurant transactions now carry a service fee, and 72 percent of US adults told Pew Research Center they oppose them. The fee is spreading, and most diners misread it.
The ownership question is the one with teeth. Tips are legally the workers'. The Department of Labor's position is that an employer cannot keep employees' tips under any circumstances, managers and supervisors included. A service charge flips that completely: once collected, it becomes part of the restaurant's gross receipts, the house's revenue. The owner can pass all of it to the servers. The owner can pass some of it to the kitchen. The owner can keep every cent to cover payroll, rent, and the card processing fees. There is no federal requirement that any of it reach a worker's pocket. Two charges can sit side by side on the same receipt with opposite legal owners. That is the whole thing to understand.
The rule to remember: whoever decides the amount owns the money. You decide the tip, the worker owns it. The restaurant decides the service charge, the restaurant owns it. Everything else on this page is detail around that one line.
There is a tax wrinkle that makes the distinction real for workers. When the house does share the service charge, those dollars arrive as regular wages on a W-2, taxed as ordinary payroll income. Tips keep their own tax treatment, and there is now a reason staff care about the label: the One Big Beautiful Bill, signed in July 2025, lets workers in traditionally tipped roles deduct up to $25,000 a year in qualified tip income through 2028. Service charges do not qualify. So when a restaurant re-labels a gratuity as a service charge, it is not just a name change. It can cost the server a tax benefit worth thousands.
The decision rules for diners
Most service-charge advice is vibes. Here is the mechanical version.
Read the words on the receipt, not the percentage. If the line says "administrative fee," "service fee," or "house fee," assume your server sees zero dollars of it unless told otherwise. If it says "gratuity" or "auto-gratuity," the restaurant is telling you the money is meant for staff, and in New York that label has force: Labor Law 196(d) bars an employer from keeping any part of a charge purported to be a gratuity for an employee. A restaurant that wants to keep a charge in New York has to label it as an admin fee and tell the customer plainly it is not a gratuity.
Default to tipping on top when the service was good and the charge is not a gratuity. Tipping extra is never required, and plenty of diners skip it, but an added tip is the only money that is legally the server's no matter what the house does with the fee. The people who lose out when service charges replace tipping are the servers, not the house.
Ask one question when it matters. For a large party bill with an 18 or 20 percent auto-charge, ask the server: does this go to you? You will get an honest answer. Servers know the difference, and it takes five seconds.
For servers: a service charge also changes your tip-out math. If your house runs tip-out as a percentage of tips, money labeled as service charge may not be entering the pool at all. Read how tip-out works on auto-gratuity before your next pooled shift, and ask management exactly which line items feed the pool.
The case where neither answer fits
Some restaurants now add a service charge and still leave the tip line open, expecting both. Pew's finding that 72 percent of diners oppose automatic charges is mostly about this: the charge does not replace tipping in the diner's mind, so it reads as a double take. If you are the operator, the honest move is disclosure before the order, not explanation after the bill. If you are the diner and the menu never mentioned the charge, you are allowed to be annoyed. The federal rules require the charge to be disclosed. Whether you like it is your business.
One number to keep in the back of your head: the average restaurant tip fell from 15.5 percent in 2023 to 14.9 percent in 2025, per Square data. Service charges are one reason why. When the house takes 4 percent off the top and calls it a fee, some diners tip less on the remainder, and the server's total compensation drops either way. The fight over who keeps the service charge is really a fight over whether it comes out of the customer's pocket, the server's pocket, or both. Knowing the legal answer does not settle the practical one. It just tells you whose name is on the money.
Frequently asked questions
Who keeps the service charge at a restaurant?
The restaurant. A mandatory service charge is legally the house's gross revenue, not a tip. The restaurant can keep all of it, share part with staff, or use it however it chooses. Tips, by contrast, legally belong to the employees.
Is a service charge the same as a tip?
No. Under Department of Labor rules, a tip is voluntary and decided by the customer, while a service charge is set by the restaurant and mandatory. Federal regulation 29 CFR 531.55 states that a compulsory charge for service is not a tip.
Should I tip on top of a service charge?
You are never required to, but if the service charge is an administrative fee that does not go to staff, an extra tip is the only money your server definitely keeps. If the charge is described as a gratuity, ask where it goes.
Can a restaurant keep a charge labeled as a gratuity?
Not in New York: Labor Law 196(d) bars employers from keeping any part of a charge purported to be a gratuity for the employee. Federally, though, a clearly disclosed service charge is restaurant revenue and the house may keep it.
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