Recognizing the terms were not defined in state law, Colorado’s second-highest court last month clarified that “tips” and “gratuities” are payments voluntarily given by customers beyond the cost of a service, and that a worker whose job is to serve food and beverages is not a “sales employee.”

The immediate consequence of the Court of Appeals’ decision is that The Broadmoor resort in Colorado Springs owes former banquet server Rowean Brennan $7,500 in unpaid overtime wages, which the hotel argued it did not have to pay because Brennan’s job of pouring drinks made him a sales employee who was exempt from overtime.

At the same time, The Broadmoor’s practice of applying a “service charge” to events, and only transmitting 60% of the proceeds to staff, did not function as a tip or gratuity. Consequently, The Broadmoor did not owe Brennan back wages as a tipped worker.

A service charge, wrote Judge Terry Fox in the June 15 opinion, “is not a tip because it is not given voluntarily – both in terms of whether to provide payment and how much if so. The customer who tips decides whether to provide money for a service and, if so, how much.”

The Broadmoor is owned by The Anschutz Corp., which also owns Colorado Politics’ parent company.

Case: Brennan v. Broadmoor Hotel, Inc.

Decided: June 15, 2023

Jurisdiction: Denver

Ruling: 3-0

Judges: Terry Fox (author)

Craig R. Welling

W. Eric Kuhn

Background: Where do restaurant “service fees” really go?

The case carried potential implications elsewhere in the service industry, as some restaurants have turned to service charges, rather than increase prices, in order to raise revenue or better compensate staff. Critics have pointed out, however, that service charges lack transparency over where the money goes.

Brennan worked at The Broadmoor between 2013 and 2019. While he was a banquet server, his hourly wage reached a high of $2.40, but his paycheck also incorporated “banquet gratuities.” The gratuities came in the form of The Broadmoor’s service charge for events, which was a portion of the dining bill. The Broadmoor kept 40% of the revenue from the service charge and distributed the rest to staff.

Brennan filed a complaint with the state alleging he was a tipped employee who should have received the minimum tipped wage, which was higher than $2.40 per hour. The investigation also expanded to encompass potential overtime pay due to Brennan.

The state’s Division of Labor Standards and Statistics initially concluded The Broadmoor owed Brennan nearly $33,000 in withheld wages and overtime, plus penalties and fines. 

The Broadmoor appealed, and hearing officer Eve Pogoriler sided, in part, with the resort. Pogoriler noted The Broadmoor had waited until its appeal to provide evidence of its business operations, and she was suspicious of the resort’s claim that its payroll software was responsible for inaccurately labeling the service charge a “gratuity” on Brennan’s paystub.

Nonetheless, Pogoriler concluded The Broadmoor had paid Brennan the required minimum wage when considering the service charge. Only a small portion of the compensation, she found, came from “bona fide” customer tips, as the service charge itself did not make Brennan a tipped worker.

She disagreed, however, that Brennan was exempt from overtime because he was a “sales employee.” Serving customers at a banquet, Pogoriler wrote, did not amount to “making sales.”

Both sides appealed her order in Denver District Court, but Chief Judge Christopher J. Baumann upheld her reasoning and her sanctions against the Broadmoor: $1,850 in fines to the state, $9,375 in penalties to Brennan and $7,500 in wages to Brennan. Although The Broadmoor actually owed Brennan $9,844 in overtime, the Division of Labor Standards and Statistics can only handle claims up to $7,500.

Once again, both parties appealed over the issue they lost.

At banquets, “servers attentively inquire if banquet guests would like additional glasses of wine. This is a sales function because the more wine servers pour for guests, the more wine the banquet host ultimately purchases,” attorneys for The Broadmoor wrote, insisting Brennan was actually a “sales employee” not eligible for overtime.

“The Hearing Officer’s conclusion that the ‘service charges’ were not ‘tips’ because they were mandatory is contrary to Colorado Law,” Brennan’s lawyers countered.

The Colorado Hotel & Lodging Association, which represents more than 200 hotels, also weighed in on behalf of The Broadmoor, explaining that treating service charges as tips would upset the “longstanding expectation” about how staff are compensated. The Colorado Plaintiff Employment Lawyers’ Association and the nonprofit law firm Towards Justice similarly wrote to the Court of Appeals in support of Brennan.

“Broadmoor’s conduct is the quintessence of wage theft,” they argued. In their view, an employer complies with Colorado law when it is transparent about the service charge, but not when it surreptitiously siphons off a portion for itself.

The three-judge panel for the Court of Appeals largely kept intact the outcome of the various proceedings. The Broadmoor’s service charge was functionally different from a tip, the panel found, as banquet customers still had the ability to leave gratuities for servers, which were treated as tips.

Fox, in the opinion, clarified the panel’s decision did not directly touch upon service charges in restaurants, but she suggested policymakers may want to further clarify and regulate such fees.

As for his entitlement to overtime pay, “Brennan was employed to provide service to banquet customers – not to make sales,” Fox wrote, agreeing Brennan should receive the $7,5000 in withheld wages. Finally, the panel did reverse the fine the hearing officer ordered The Broadmoor to pay the state.

David H. Miller, an attorney for Brennan, said he represents more than a dozen other ex-Broadmoor employees who are pursuing similar claims against the resort. Those cases could move forward soon unless Brennan, The Broadmoor or both appeal to the Colorado Supreme Court.

“We’ll see how this develops,” he said.

Lawyers for The Broadmoor did not respond to a request for comment. While the appeal was pending, the Division of Labor Standards and Statistics adopted a meaning of “tips” that resembles the Court of Appeals’ definition.

The case is Brennan v. Broadmoor Hotel, Inc.