By Mandy DeLucia, Synergy Project Coordinator
Labor costs are rising and savvy restaurateurs are reevaluating their labor models. Ever since hospitality guru Danny Meyer surprised the industry with an announcement about moving to eliminate tipping in his restaurants, the industry has been discussing the merits and pitfalls of a tip-free system. We have outlined five important factors to consider as you formulate your own opinion on the debate.
1.) Fine dining is better suited to the “service-included” model.
Restaurants with higher prices could have an easier transition away from tipping because customers may not be as sensitive to an added 18% gratuity charge or a 20% increase in prices. As the fast-casual sector continues to thrive, customers are growing used to an experience where they participate in some way in the service model in exchange for a high-quality meal with no tip expectation. Value-focused customers have moved away from casual dining, where mandatory tipping makes the bill more expensive. But in a fine-dining setting, a shift in price from a $30 steak entrée to a $36 one is unlikely to have a negative impact on traffic—provided the guest experience remains positive.
2.) Moving to a salary model will require a shift in employee evaluation and training procedures.
The tip system minimizes the need to evaluate servers and give them raises. Of course, operators always evaluate servers to ensure they’re doing a good job, but the tip, and not an annual raise, provides that incentive. Similarly, servers are driven to deliver drink refills or offer friendly and hospitable service by the direct reward of a good tip. In a tipless system, management will have to consider giving workers annual raises and pay close attention to overtime, given that they’d be responsible for paying even more in wages if their staff works more than 40 hours per week. As restaurants move to higher wages, the cost of benefits will be higher too. And if tip policies go away, restaurants will also have to reinforce training that encourages servers to deliver good service at all times, regardless of the tip reward.
3.) Just because it works in Europe doesn’t mean it’s right for the U.S.
Some will argue that restaurants in Europe don’t rely on tips and yet the system works. However, in the U.S., our system is different and it is not an easy comparison. In order to fully understand the complexity of that assessment, one would need to compare factors such as payroll policies, labor costs, rents, taxes, costs of goods, hours of operations, holidays, employee benefits vs. publicly provided benefits in European nations, even cultural habits and dining times.
4) Changing technology is impacting the way people tip.
With the shift of liability for fraud forcing restaurants toward using integrated POS systems with EMV chip capabilities, restaurants are finding that the new system is impacting payment processes. EMV handheld readers must sync with POS systems, but transactions can no longer be processed away from the customer. With chip-and-PIN cards, tipping will have to be processed before, not after, the customer pays the bil, which will mean that the server will be nearby while the tip is being decided. With the rise of tablet-based payment systems for smaller or independent operators, guests paying by card are being offered tip options of 10%, 15% or 20% at the time of purchase or must opt-out of tipping completely to finalize a purchase. This can add a layer of discomfort to the transaction as it happens under the gaze of the beneficiary of that tip.
4) Tipping as a portion of compensation supports small businesses and facilitates start-ups for independent operators.
Of course, management in the restaurant business would like to pay their staff more, and would like to compensate back-of-house employees as well as servers, whether through improved benefits, recurring bonuses, profit-sharing, stock options or real wages. However, small increases on a daily basis hit hard and fast when multiplied out over a number of employees with a number of shifts per week over the course of a year. Small operators can offset labor costs to customers through tipping, which subsidizes an extra $5.12 to tipped workers (the gap between the minimum required rate for tipped workers vs. minimum wage). Tipping also allows servers the opportunity to exceed an hourly rate, rewarding good service but also helping busy restaurants recruit hospitality talent through the prospect of higher earnings.
5) Eliminating tipping could result in better food.
In restaurant cultures where tips aren’t part of the business model, line cooks normally make considerably more than waiters. The U.S. has a system that prohibits servers from sharing tips with cooks, dishwashers, and other staff who do not interact with customers. By adding a service charge to every check, operators could help close the divide in restaurants between the tipped and the non-tipped—a change that could benefit staff and customers alike. The checks may get a little bigger, but if a happier, better-compensated staff is making the food a little tastier and bringing the wine a little faster, everyone wins.
Remember, too, that a no-tipping model can also lead to better service. As this article in Restaurant Business points out, since Joe’s Crab Shack switched to a set wage, they have had fewer problems with service on big parties, which are a frequent source of business for the 18-unit chain. That’s because servers often balk about having to split the tip with someone who helps them; now a big party is assigned the number of servers it needs.