Restaurants and hotels in the hospitality industry often add an automatic service charge to customers’ bills. As we close out the year and head into 2026, businesses in the hospitality industry may want to take this opportunity to ensure they are complying with state service charge laws, which often include both consumer protection laws and employment laws.

Quick Hits

• Businesses in the hospitality industry may want to ensure they are complying with state service charge laws, which often encompass both consumer and employment regulations.
• In 2025, several states, including California, Colorado, Florida, and Massachusetts, enacted laws regulating or prohibiting automatic service charges, emphasizing clear disclosure and transparency to protect consumers and employees.

A service charge is not a tip or gratuity, and if the service charge is distributed to employees, it should always be included in an employee’s regular rate of pay for purposes of calculating overtime. While federal law permits an employer to keep all or a portion of the service charge and does not require any specific disclosure language, more states are passing their own laws that impact employers’ use of the service charge. Failure to comply with state service charge laws could result in significant damages and penalties to employers.

Changes in 2025

In 2025, several states enacted legislation that outright prohibited the use of “junk fees” (which can include automatic service charges often used in the hospitality industry) or heavily regulated when and how these automatic fees could be assessed. California, for example, enacted a law in 2024 that prohibited assessing automatic fees on top of a customer’s bill and required including the fees in the total price. The state later provided a carveout for restaurants.

Massachusetts enacted “junk fee” regulations (effective September 2, 2025) requiring all mandatory fees, including service charges, to be clearly disclosed in the first advertised price to consumers. Under this new law, automatic fees must be included in the total price displayed to consumers. The law also requires disclosure of the nature, purpose, and amount of the automatic fees included in the total price.

Under Colorado’s 2025 “Protections Against Deceptive Pricing Practices” law (signed into law April 2025 and effective January 1, 2026), restaurants and other businesses must clearly and conspicuously disclose the existence, amount, and purpose of any mandatory service charge. They must also explain how the service charge is distributed.

In 2025, Florida enacted Chapter 2025‑113, codified at Fla. Stat. § 509.214, which imposed strict disclosure rules on “operations charges” (including automatic gratuities and service charges) used by public food service establishments. The law does not ban such charges outright, but it requires clear pre- and post-transaction disclosure (menus, websites, mobile apps, receipts) and applies across restaurants, banquet facilities, hotel outlets, and online ordering channels. The statute takes effect July 1, 2026.

Looking Ahead

Several states already have service charge laws that are more restrictive than federal law (New York law, for example, presumes an automatic fee is a tip, meaning it is owed entirely to the employee, unless there is proper compliant disclosure), and more states are trending toward employee and consumer protection on this front. It is prudent for employers to stay up to date with state laws in this area to avoid liability. Some employers may even opt to use overly transparent disclosure language when they assess automatic service charges, even in states where such language is not required.