Restaurant Wars: Is The Tipping Economy at a Tipping Point?

Business.com / Industry / Last Modified: February 22, 2017

A major NYC chain of eateries is eliminating tipping and raising prices. Is this the future for restaurant businesses?

How much of a tip should you leave?

The standard answer is 15 to 20 percent, though some still adhere to the 10 percent rule (these people are called old and stuck in their ways or, less charitably, cheap).

How do you decide if it’s 15 or 20? The higher amount goes to exceptional service.

Some would argue 10 percent is reserved for inadequate service, and some go further that no tip at all is the only appropriate response to poor or incompetent service.

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The questions continue. Are you supposed to tip on the check’s subtotal, not the taxed amount? Are you the type of person who rounds up and guestimates, or do you reach for your smartphone’s calculator and figure it out to the decimal point?

Then there’s the question of whether you should tip the folks at Starbucks or the washroom attendant who puts a towel you didn’t ask for in your hand. The whole thing gets so complicated you might want the handy chart developed by the Emily Post Institute.

We assume that tipping is a way to reward behavior. But it’s not. If you’ve ever worked as a server, you’re probably likely to tip automatically, even for bad service, because you know first hand just how tough working conditions are and how little you get paid on the books. Indeed, as 

Indeed, as CNN Money senior staff writer Jeanne Sahadi points out, the reason we tip is because it’s an accepted cost of being served, regardless of the quality of service. “Tipping is expected. It’s part of your bill, except that you need to do the math. Personally, I wish restaurant owners would pay table servers a living wage so they wouldn’t rely so heavily on my tips for income. Bu then, the argument goes, owners would raise menu prices.”

Which is exactly what the Union Square Hospitality Group intends to eventually do at its 13 restaurants: eliminate tips and raise prices.

What’s a Living Wage?

A number of other restaurants, including the Shake Shack burger chain of 13 full-service restaurants and the Houston-based Joe’s Crab Shack chain of 113 seafood eateries, are also adopting a no-tipping policy. In part, this has been a response to the living-wage movement’s successful campaign to raise minimum hourly pay rates for low-income workers. Since they were going to have to pay workers more anyway (even if at the “tipped minimum,” which permits lower than minimum hourly wage in situations where gratuities are expected to make the difference and for which, ahem, workers are responsible to report taxes), it seemed the right time for restaurants to proclaim a no-tipping policy while raising food prices to compensate for higher salaries. In addition, given the high turnover of restaurant workers, new state wage ordinances that raise fast-food workers to a guaranteed minimum hourly wage of $15 could look tempting to those making tipped minimums of $7.50.

In part, this has been a response to the living-wage movement’s successful campaign to raise minimum hourly pay rates for low-income workers. Since they were going to have to pay workers more anyway (even if at the “tipped minimum,” which permits lower than minimum hourly wage in situations where gratuities are expected to make the difference and for which, ahem, workers are responsible to report taxes), it seemed the right time for restaurants to proclaim a no-tipping policy while raising food prices to compensate for higher salaries. In addition, given the high turnover of restaurant workers, new state wage ordinances that raise fast-food workers to a guaranteed minimum hourly wage of $15 could look tempting to those making tipped minimums of $7.50.

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Danny Meyer, CEO of the Union Square Hospitality Group, however, sees it differently. He has been advocating a switch to the all-inclusive, no-tipping European style system for more than twenty years. Here’s what he wrote in 1994:

The American system of tipping is awkward for all parties involved: restaurant patrons are expected to have the expertise to motivate and properly remunerate service professionals; servers are expected to please up to 1,000 different employers (for most of us, one boss is enough!); and restaurateurs surrender their use of compensation as an appropriate tool to reward merit and promote excellence…Imagine, if to prompt better service from your shoe salesman, you had to tip on the cost of your shoes, factoring in your perception of his shoe knowledge and the number of trips he took to the stockroom in search of your size. As a customer, isn’t it less complicated that the service he performs is included in the price of your shoes?

Higher Wages Are Fairer for Everyone

Interestingly, Meyer isn’t so much concerned about what servers are making as with those in the kitchen. NPR reports Meyer’s observation that server wages have risen by as much as 200 percent over the last thirty years. That’s because menu prices have gone up, and the average tip amount on those higher prices has risen from a 1985 average of 15 percent in to about 21 percent today. 

But for those working in the back of the house who don’t get tipped, wages have risen only about 25 percent over the same time. Meyer argues: "So by incorporating everything in the menu prices, and therefore, having it be the restaurant’s responsibility to pay everybody a fair wage, we think we have the opportunity to make a great place to work for everybody—not just servers, but also for our cooks.”

Of course, consumers are going to pay more, put if price hikes stay within the 20 percent they would tip anyway, any initial sticker shock should be alleviated. The question is whether or not both workers and diners will be comfortable leaving behind what is, after all, an ingrained part of the culture.

The New York Times reports the doubts of Drew Nieporent, owner of nine restaurants operating in New York City and London, that the average diner would accept the tip-free rationale for higher menu pricing. “Tipping is a way of life in this country. It may not be the perfect system, but it’s our system. It’s an American system.”

This is a view shared by the National Restaurant Association, and is supported by many restaurants that have switched back to tipping after trying to eliminate it, notes Joseph Erbentraut of the Huffington Post. The New York Times notes that San Francisco restauranteur Daniel Patterson really believed in the tip-free model, but customers didn’t. “It’s about perception. It’s not just about the dollars you’re spending, but what you think you are spending.”

Servers also seem to have mixed feelings about the policy. It’s nice to have a consistent wage you depend on, particularly if benefits are included. On the other hand, someone who earns good tips (not all of which are, ahem, reported on taxes) could feel a pinch. Pennsylvania bartender and server Kayla Stoner says she can make up to $400 in tips per shift. Without tips, some servers might not be as motivated to work, resulting in an unfair work environment.

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Trying to Alter Customer Expectations

However, that’s true of any salaried work environment. While still in its experimental stages, restaurant owners might consider what happened when another industry tried to remove costs and make its service more equitable. J.C. Penney once tried to get rid of coupons and periodic sales events, saying everyone could benefit equally from the same everyday lower prices. How did that work out for them?

J.C. Penney reported a $163 million net loss in the first quarter after adopting the policy, eventually fired the CEO who came up with idea and went back to holding sales and other discount programs. Why? Because that’s what consumers like and, maybe more importantly, are used to.

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