Many restaurant servers in America depend on tips to compensate for their low wages, but this might be coming to an end soon for many establishments. NYC restaurateur and chief executive officer of the Union Square Hospitality Group (USHG) Danny Meyer announced October 14th that he would be eliminating tipping from all 13 restaurants under the USHG umbrella by the end of 2016. Instead of a “tip” line on checks, all menus and checks will be stamped with a “Hospitality Included” mark. Accordingly, Meyer says that menu prices will rise with the absence of gratuities, making many wonder if this effort will improve or hurt the current system.

Positives of a no tipping policy

The lure of working at a restaurant is often because of the generous tips that allow workers to make far more than minimum wage, so why would restaurants want to jeopardize this for their employees?

Here are some positives of the no tipping movement:

• Ability to increase wages and advance workers’ careers. Perhaps the biggest force behind Meyer’s decision was the unfair pay of cooks and kitchen staff. By raising the wage for kitchen staff, employers can give more incentive to workers to advance in their careers and feel more valued in their positions.
• More equality among all workers, front and back of restaurant. By eliminating tips, restaurant owners can give out more equal paychecks between the kitchen workers and wait staff. In a normal system, kitchen workers are compensated at much less than those that work in the front of restaurant serving customers directly.
• More steady wages on a slow day. Though servers can expect to make more than minimum wage on a busy weekend night, they know that on a slow night they will be making far less than average. By establishing a steady wage for restaurant workers, employers can guarantee a dependable, non-fluctuating pay schedule.
• Tips are sometimes demeaning- Similarly, a common complaint among servers is that it is sometimes impossible to provide top tier service, given the unpredictable nature of the industry. Restaurants are understaffed some nights; there are mistakes in the kitchen that delay service, etc. This means that, unfortunately, a server’s tips depend on things out of his/her control and could be very low even though that server has tried his/her best.

Negatives of eliminating tips

• Hiking menu prices is a serious consideration- Adding $2-$3 to each entrée is a big deal, and one that might detract customers from dining at a restaurant.
• Retaining servers- Some servers will end up making less, experts say. The lure of taking home cash is what attracts many individuals to the industry, and given the fluctuating nature of tips, some servers end up making much more on certain nights than they would if given a steady $15 wage, for example.
• Customer concerns- A majority of restaurant visitors use the tipping system as a way to communicate how good or bad their service is, so without tips how will this be possible? In addition to this, many customers feel that if servers are given a steady wage, there will be no incentive for them to provide excellent service, being that they’d be receiving the same compensation for mediocre performance, too.

Any tax implications?

Paying restaurant employees a straight salary means that employers are giving up a hefty tax credit on tipped income, the Federal Insurance Contributions Act (FICA) tip credit (Check out our blog: “Revisiting the FICA Tip Credit”).

Suggested by the name, the FICA tip credit is only available to restaurants where employees receive tips. Meyer’s Union Square Hospitality Group expects to lose between $1 million and $1.5 million on the credit given this recent change.

By allowing the employer to determine an employee’s compensation rather than the customers, Meyer has drastically changed the way his restaurants conduct business. Equality between front and back staff is the driving force behind Meyer’s decision, and could influence other restaurants to follow suit, but there are some serious considerations that restaurant employers should make before committing to such a change.

Questions? Contact any member of our Hospitality Services Group.