Service Charges Overview

In this Article:

• Service Charges Overview
• Compare Employer-Kept Service Charges and Mandatory Gratuity
• Service Charge Setup
• Additional Resources 

Service Charges Overview

Service charges are an additional fee restaurants can add to a guest’s check for different reasons, such as a fee for an order delivery or an inflation fee to help offset overall economic inflation costs. Service charges are added to a guest’s bill no matter the guest’s chosen form of payment, whether cash, credit, debit, gift card, etc. 

Examples:

• Distance-based delivery charge
• Large dining party automatic gratuity
• Banquet event fee
• Takeout fees to cover physical overhead such as subscriptions, napkins, utensils, etc.
• Takeout fees to cover online ordering costs
• Hotel room service charge

To compliantly apply a service charge to all forms of payment, ensure the service charge itself is entirely unrelated to using a credit or debit card (or other payment method) and that the service charge is being applied equally to all guest transactions regardless of the payment method (e.g., cards, cash, gift cards).  

Note: Surcharges are additional fees added to a guest’s check whenever a guest pays for a transaction with a credit card. Restaurants should not use the “service charge” feature to apply credit card surcharges. Restaurants attempting to do so bear a risk of non-compliance. Please do not use the service charge functionality for surcharges. Any fee added via Toast’s service charge functionality that is applied only to card payments (or removed only for non-card payments) is a non-compliant credit card surcharge.

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Compare Employer-Kept Service Charges and Mandatory Gratuity

Before we continue, let's discuss the difference between an employer-kept service charge and a mandatory gratuity. In Toast, service charges can be distributed to an employee or kept by the restaurant. This distinction is made possible by the Assign to check owner (Gratuity?) option in a service charge's setup. Navigate to Payments > Checks & receipts setup > Service charges to view and edit your service charges, including this option.

• If you select Yes for this question, the service charge is distributed to an employee and becomes known as a mandatory gratuity.
• If you select No for this question, the service charge stays with the restaurant and is known as an employer-kept service charge.
• This setting affects the way this charge will appear in your general ledger (GL) codes and accounts, if applicable.
• Learn more in Get Started With Service Charges and Mandatory Gratuity.

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Service Charge Setup

Toast recommends following the checklist and best practices below to create service charges.  

• If you are unsure about the local laws, regulations, or applicable card network rules applicable to you, please consult a professional. When you add a service charge using Toast functionality, during checkout, both you and your customers will see service charges as a line item on the transaction. Some jurisdictions may have additional requirements, such as requiring that any extra fees are included in advertised menu prices. If your local laws, regulations, or applicable card network rules have additional requirements that prevent your use of Toast’s existing service charge functionality, please remember to keep all of your operational costs in mind when implementing pricing to help promote sustainable margins.
• Name the service charge: When creating service charges, Toast recommends using specific naming conventions to ensure there is clarity and transparency to guests, and help avoid potential card brand violations. The language used to name fees should be clear, concise, and easy to understand. When creating service charges for overall operating costs or specific services, 
  • Consider using: 
    • “Inflation Fee,” “Venue Fee,” “Admin Fee,” “Restaurant Fee,” “Technology Fee,” “Service Charge”
  • Don't use:
    • “Surcharge” - since this fee is not a credit card surcharge, the word “surcharge” should not be used in the name or description.
    • Payment method specific names - any phrase that is related to a payment method or transaction processing should not be used, such as: “transaction fee”, “credit card fee”, “non-cash fee,” “processing fee,” etc.
    • “Convenience Fee” - has specific card brand rules and may result in card brand violations if used incorrectly.
      • A convenience fee is a fixed flat fee service charge that is added to checks when the guest makes a purchase in a card-not-present environment, such as an online ordering channel, outside of a merchant’s customary payment channels. Convenience fees, like credit card surcharges, must follow specific rules set by card networks and state laws:
        • Can only be applied to payments made in card-not-present channels
        • Must be applied to all payment methods equally
        • Must be a fixed flat fee ($) per purchase, never a percentage (%)
        • Must be adequately disclosed to guests before they choose to make a purchase
        • Cannot be used in combination with a credit card surcharge
    • “Service Fee” - has specific card brand rules and cannot be used by restaurants.
      • Avoid characterizing any fee in a way that differs from its true purpose. For example, a fee should not be characterized as a mandatory gratuity unless it is treated as such for the benefit of staff in accordance with applicable laws. 
• Apply to ALL payment methods equally: To help avoid your service charge automatically becoming a surcharge, it must be applied equally no matter what form of payment the guest uses, including cash and gift card payments.

If a service charge is waived for cash-paying guests, it is considered a non-compliant surcharge. Cash discounting should not be used in conjunction with service charges. 
 

• Train your staff: Train and inform your staff about the service charge and ensure any response they provide a guest regarding the new fee is unrelated to using a payment method. Ensure staff do not remove or reduce the service charge for specific payment methods. 
• Disclose fees clearly: Disclose fees to guests before they choose to make a purchase. It is important that fees are transparent and not hidden from guests. Use language that is accurate and easy to understand. Post signage of your service charge where necessary to inform guests – such as at the point of entry to your location, near the POS, on menus, in the dining area, and on your restaurant’s webpage. Ensure the disclosures do not imply that the fee is related to using a payment card or other payment method. 

Note: Requirements for certain fees, cash discounting, and credit card surcharging are set by card brands (e.g., Visa, Mastercard, etc.), not by Toast. Following these requirements will ensure your restaurant remains compliant and will help you avoid potential fines and violations from card brands. 

For detailed steps on how to create, edit, or rename a service charge, see Customize Service Charges and Mandatory Gratuity.

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Additional Resources

• Get Started With Service Charges and Mandatory Gratuity
• Surcharging & Other Ways to Offset Costs
• Surcharging Overview
• Cash Discounting Overview

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