June 9, 2016

The Tipping Point: an objective perspective on the tipping debate

A 200-year history in America has allowed gratuity to become a given, but recent moves from restaurateurs nationwide are causing things to change. Why now?

Let’s start with the basics.

Restaurants generally don’t make a lot of money. (We say that as an objective consultant to restauranteurs.) The margins are razor thin and labor is a big component of it (along with food costs and rising overhead). Labor is significantly affected when minimum wages rise and labor laws change, which is now happening across the country.

How does this issue affect consumers?  As restaurateurs are faced with mandated rising costs in a low margin business, they’re looking for solutions to keep their labor pool and keep their customers.  As a result, consumers face rising menu prices and changing tipping policies.

The effect on restaurateurs is that they’re struggling to not only keep good employees (in both the front and back of house), but to keep customers coming in as they deal with more obstacles to business success. Danny Meyer, New York restaurateur and president of Union Square Hospitality, created a national conversation by eliminating the practice of tipping gradually, with plans to raise menu prices at his restaurants by 18-20% in order to make up the difference, putting the extra funds towards higher staff wages in lieu of tips.

A Little Explanation

Currently, most servers make below the legal minimum wage (for example, in New York, servers are generally paid the “tipped minimum” of $5/hour, when the city’s true minimum wage is $8.75/hour) with the expectation that tips will make up the difference (called “tip crediting” and not legal in every state). So while paychecks are low, tips can quickly add up to servers making roughly $20/hour—a major disparity between front and back-of-house when most line cooks make that $8.75/hour wage.

With minimum wages across the country scheduled to rise over the next few years, the “tipped minimum” could be on its way out. If waiters make the same base wage as cooks and still receive their tips (which are legally their property and under no obligation to be split with back-of-house staff), the gap will grow even further. Meanwhile, new federal regulations and labor laws enforcing sick leave, overtime, and a climbing minimum wage mean that dining establishments need to do something different to attract talented cooks.

What We Bring to the Conversation

At Shea, we work with restaurant clients on business and brand, including service—thus, we have an intimate knowledge of the restaurant industry without being in it ourselves. We make it our business to know what’s going on. And it’s our business to help our restaurant clients be successful in theirs.

Side 1: Tipping Practices Need to Change

Those who believe that there needs to be a change in tipping practices propose eliminating tipping altogether, either adding a service charge or raising menu prices. Why? They believe tipping is unfair—based on race, gender, size of server, you name it (Cornell’s even done studies in the past few years to prove the disparity—white, female, and thin servers make significantly higher tips than their counterparts regardless of the race, gender, and size of their customers).

The second key (and maybe even more critical) reason that many want to change the custom is the front-of-house/back-of-house wage disparity. This is particularly true in states where there is a standard minimum wage and no tipped wage credit—meaning that there is no option for a “tipped minimum” and servers earn tips on top of the wage often earned by back-of-house-staff. Minnesota, where Shea and roughly 50% of our restaurant clients are based, is one such state. The argument is that if they eliminate tipping, restaurateurs can distribute a service charge to all staff—including the kitchen.

Side 2: Tipping Practices Should Stay the Same (or evolve slowly)

On the other side of the coin, plenty of industry experts believe that tipping practices should either stay the same or evolve slowly, as customers are ready for them. The first reason, of course, is habit. If it works, why change it? The American tipping system is unique to our country (the norm in most European countries is to add a service charge to each bill, with no obligation or pressure to leave additional gratuity) but is deeply ingrained—and a big change can mean a big turnoff for customers. And consumers may tip regardless of higher menu prices or an included service charge.

Some markets just aren’t ready to make the switch to a less conventional model. Parasole Restaurant Holdings, which operates eight dining concepts in 12 locations across the Twin Cities metro area, uses a conventional tipping system, and COO Donna Fahs doesn’t see that changing any time soon—for her company or others locally, regardless of personal feelings. “New York seems to be a more favorable environment to implement [a no-tipping] policy,” she says. “I have talked to numerous operators here in Minnesota who would love to adapt the policy but are very reluctant to do so.”

It also becomes unfair to good servers who go above and beyond the call of duty to ensure that restaurant patrons have an exceptional experience. After all, shouldn’t their hard work be rewarded over a server who doesn’t keep water glasses full, offer samples of new tap beers, or answer menu questions with ease and expertise? Greg Hoyt, co-founder of Minneapolis’ Dogwood Coffee and owner of James Beard award-winning Rustica Bakery, notes the value that Twin Cities diners put on being able to award servers accordingly. “Diners like having the power of the purse when it comes to deciding what to leave a server,” he says.

Abby Jimenez, owner of national cupcake shop Nadia Cakes, worked as a server for many years and is in favor of maintaining current tipping practices. “[With a service charge or higher prices], they’re still paying for the tips, it’s just being added to the bill,” she explains. “Personally, I’d be upset if I received poor service and I knew that the server would still receive a tip. I also think tipping is an incentive for a server to provide good service.”

Another issue is that while a model that increases prices may work for finer-dining restaurants, it’s harder for mid-level establishments to implement—and that level comprises the majority of eateries in the country. Higher guest checks can absorb price changes more easily due to overall costs and guest perception. But Andy Cohen, owner of Minneapolis restaurant The Bad Waitress, notes that the lower the guest check, the more apparent higher prices become. “For higher-end establishments, it is much more of a seamless move to add 20% to the menu price and eliminate tipping,” he explains.  If I’m going to pay $50 for an entrée, it doesn’t matter all that much if I pay $60—I may not even notice.  At a $10 price point, going to $12 is a pretty big deal.”

Is there a way to solve it?

Solve? No. Evolve? Yes.

The easiest way to even out the disparity and meet business needs is to raise prices. So why doesn’t everyone do it? In most markets, you’ll lose guests if your prices aren’t competitive. Danny Meyer is popular enough in New York that guests will keep coming to his hotspots despite an increase. But Minneapolis restaurants Upton 43 and Victory 44, both run by chef/owner Erick Harcey, attempted a service model in which food was priced 18 to 20 percent higher and a no-tipping policy was employed. The price difference went towards higher server wages, merit increases, and benefits such as paid days off.

Less than three months later, Harcey ended his experiment and reduced menu prices, going back to a standard tipping model. Although they stated that both servers and guests were happy with the policy, Harcey and his team cited an inability to stay competitive price-wise in the Twin Cities market as reason for the change. As Greg Hoyt explains, “Sticker shock on menus of restaurants that need to cover increased labor cost is prohibitive unless it becomes common enough that people accept a new reality.”

Eric Hall, COO of juice bar Juice So Good in Minneapolis, suggests some markets just aren’t ready to be trailblazers in changing policies. “Until the no-tipping movement becomes the norm and there are across the board increases in restaurants and cafes,” Hall says, “it will be difficult to impossible for individual establishments to make the change.”

The second way to solve the disparity is to employ a service charge for customers in lieu of their leaving a tip, a system emulating that of the Europeans. Citing the unfairness of tipping overall and the wage gap between front and back-of-house, Lenny Russo, James Beard-nominated chef/owner of St. Paul’s Heartland restaurant, believes that he has found a model that will work. “Applying a 20% hospitality surcharge to all of the checks that is collected by the house and redistributed in a more equitable fashion is the best model and best solution for correcting these issues,” he explains. Russo hasn’t yet changed his traditional tipping policy, but is considering making a switch this summer.

This is the method which has been successful for restaurants such as New York’s Dirt Candy, where chef/owner Amanda Cohen adds an “administrative fee” to every bill that goes towards salaries (beginning at $15/hour, nearly double the city’s minimum wage) for both cooks and servers.

But taxation makes this tricky—if the charge is added before the bill is taxed, diners are bound to be disgruntled about paying 7-10% taxation on top of the service fee. The best option is to tack the service charge on after taxing food cost, comparable to leaving a 20% tip.

The third solution is for servers themselves to take responsibility to resolve the disparity between front and back-of-house. Although tips are legally the property of servers, creating a new tip-sharing norm could make things more equitable. Abby Jimenez acknowledges the inequality. She suggests that servers sending a percentage of their tips to the kitchen could be a fair solution that would help draw more back-of-house workers, but knows it may not be a popular policy with waitstaff. “That would be a hard sell for some servers, who might tip down to an expediter or bus boy but aren’t used to tipping back of house people,” she says. “But as a server, I was highly aware that my tips were the result of food made fast, correctly, and well, and I could definitely see why the kitchen staff deserves more.”

Overall, higher-end restaurants will need to look to price increases and service charges at some level in order to maintain a talented kitchen staff, both of which will affect guest loyalty. They’ll also need to be diligent in keeping and rewarding only the waitstaff who work hard in order to maintain their current customer-service standards.

And the mid-level restaurants? For now, they’ll have to ride it out until the legislative dust settles and wait for higher-end spots to pave the way, priming diners with service charges and higher prices. As always at Shea, we’ll be tracking the trends, the laws, and the reactions to make sure that our clients create the best experiences possible for consumers.

*A condensed version of this article was featured on FSR magazine’s website. See it here.

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