During the last year our industry has had an ongoing conversation/controversy regarding tipping.
The pros and cons have been debated mercilessly in blogs, online forums and even the mainstream news. Primarily this conversation has revolved around the ongoing argument that food service employees are underpaid. The Fight for $15 movement isn’t just a fast-food cause, especially if their momentum pushes a significant national increase in minimum wage. Many of you could be looking at ending tipping and moving to service charges as an alternative structure for your business.
This decision is no small change.
You to define your alternatives. Currently, most folks think in binary terms of tipping and not tipping. While that is largely true, there are some modified versions of each that bear attention. Just because you institute a service charge doesn’t mean guests can’t tip; you just have to be very clear that the service is included.
Some operators are taking a different approach and hiring people that can work both the front and back of the house positions and rotating them. This ensures equal wages across the entire staff. It’s also a smart strategy, if only, because your team will be completely cross-trained. In the end, however, there are two dominant approaches -- embracing tipping or eliminating it.
How Do You Choose?
The decision to eliminate tipping should include a frank financial analysis and that means looking at several factors.
- Does your State or Municipality allow tip credit for hourly employees? If the answer is yes, it will be more difficult to justify eliminating tipping because of the inherent increase in labor cost. Conversely, if you must pay an ever increasing full minimum wage to tipped employees then choosing to eliminate tipping becomes easier to entertain.
- What will be the impact on your sales? A service charge may not be taxable in most states, but it does add to your overall revenue. This means your taxes could increase if your business is profitable. Technically, you will see an 18% (or whatever service charge number you choose) to your sales. You need to make sure your labor increases don’t outstrip the service charge you set.
For those of you that have percentage rent deals this can be even more complicated. You will certainly need to contact your landlord to ensure they will exempt your service charges from your sales total.
- What will your guests think? Too often this question isn’t either asked or researched. Take the Joe’s Crab Shack experiment with no tipping. The acceptance varied widely by community and even restaurant to restaurant. Their conclusion was that consumers preferred to have control over that aspect of their dining experience. This doesn’t mean that guests won’t accept no-tipping, just that they may need more time to understand it.
- What impact will no-tipping have on service quality? This is a broad consideration, but valid nonetheless. If you have professional servers on your staff, they may not respond well to what will ultimately be a pay cut. If they leave, that could be a blow to your service execution and cost you a fortune in replacing them with new staff members.
- Will how you manage labor change? With servers and bartenders that can be paid a lower wage due to tip credit, we have been fairly sloppy with cost cuts and scheduling. At $2.13/hour you could be cavalier with your labor, but at $20 every minute is expensive. You will need to revisit your scheduling practices and labor management processes. If you think you will struggle, get help before you start a no-tipping policy or you could find yourself losing money directly from payroll increases.
- How will you manage the transition? Any policy changes in your operation can cause a disruption and ending the tip culture is a doozy. You will need to be clear with guests. Drive your servers to reinforce the new approach to protect guests from tipping inadvertently. You may want to remove the tip line from your credit card slips or require that your servers fill in the blank with “service included.”
This is a personal decision that many of you will be facing as labor costs increase and margins decrease. Labor is our single biggest expense -- even greater than food cost in most restaurants. Managing it is crucial. If moving to a no-tipping policy is your alternative, be prepared and thoughtful. It’s clear the tip culture is alive and well, but for how long may be up to you!
