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GrubHub Tipping Probe Began With Seamless

NEW YORK (TheStreet) -- GrubHub (GRUB - Get Report) said on Wednesday it had settled with New York State Attorney General Eric Schneiderman on how the online food delivery service charges its restaurant partners. Tips that customers pay will no longer be included in GrubHub's take from restaurants.

The goal, Schneiderman said, was to ensure that tips GrubHub collects in delivery orders are distributed in full to the delivery workers for whom they were intended.

"Our settlement with GrubHub changes a billing formula that may have been used by restaurants to shortchange workers out of their hard-earned tips -- tips that customers intended for them," Schneiderman said. The New York AG also said Wednesday's agreement solves an issue that may have impacted thousands of delivery workers.

Schneiderman's investigation appears to have initially targeted Seamless, and was opened prior to the company's merger with GrubHub. An investigation was opened in February 2013, on reports that some Seamless restaurants were keeping a portion of their employees tips.

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The investigation found that Seamless calculated and charged a fee to its restaurant partners based on a percentage of the total food and drink, taxes and tips paid by customers. However, New York labor laws prohibit companies from retaining any portion of a tip. Seamless's fee structure also created an incentive for restaurants to keep a portion of tip monies, the New York AG said.

Wednesday's agreement requires that GrubHub now require its restaurant partners use a fee calculation that excludes tips.

GrubHub's April IPO

Earlier in April, GrubHub listed its shares on the New York Stock Exchange in a highly sought after listing. GrubHub burst out of the blocks on its first day as a public company, with shares trading well above the company's offering price of $26 a share. The company closed Wednesday trading at $37.52.

Chicago-based GrubHub brought in revenue of $137 million in 2013, including its recent merger with Seamless, a 67% increase on 2012. GrubHub also racked up a net profit of over $5 million. According to GrubHub's S-1 filing with the Securities and Exchange Commission, the firm has 135,500 daily active 'Grubs' and 3.42 million active diners at the end of 2013.

In its IPO prospectus, GrubHub said that it serves more than 600 cities worldwide and nearly 30,000 restaurants.

-- Written by Antoine Gara in New York

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