When diners go out to eat at a restaurant, one of the things they expect to add to their bill is a tip. However, many establishments are transitioning to a no-tip policy. National chain Joe’s Crab Shack recently announced plans for a no-tip policy and Michelin star rated El Ideas in Chicago has become a front-runner in removing tips from their restaurant. A variety of reasons are cited for restaurants going to a no-tipping policy including minimum wage increases, employee satisfaction, and simplified business reporting. Is there a benefit to a no-tipping policy? Is tipping fair to employees? Let’s take a look at some of the pros and cons of removing tips from restaurants.
Pros of No-Tipping
The topic of livable wages comes up a lot in the restaurant industry, and the fairness of the tipping system is hotly debated. When you remove tips from a restaurant, the wait staff becomes more like office workers where they can receive a reasonable hourly wage along with benefits. For over 25 years, tipped workers’ wages have been set at $2.13 an hour. One restaurant kept track of how much their average worker was paid, including tips, and it added up to only about $8.25 an hour. With that in mind, here are a few more bonuses to a no-tipping policy.
On slow days, your wait staff will still be guaranteed a reasonable wage. Restaurant management will not have to deal with staff fighting over the “good” shifts or struggling to get workers in the door on the off nights.
A consistent paycheck not dependent on tips helps both the employer and employee effectively plan for their financial well-being.
Health insurance is not always offered to tipped employees. If an employee is on an hourly wage and has health insurance available to them, they can stay healthier. Healthier workers mean less sick days and less scrambling to fill in shifts.
No-tip policies often answer back-of-the-house employee complaints regarding poor wages. Workers like cooks and dishwashers are not generally included in any tip sharing, and removing tips theoretically puts them in line for a wage increase.
Some restaurants have seen an increase in revenue due to their customers’ positive perceptions of paying a fair wage.
Sales-based incentives and team goals can be implemented to encourage servers to continue to provide excellent service.
Not working for tips cuts back on servers “fighting” for tables, and instead encourages them to work together as a team.
Tip size doesn’t always reflect the quality of service. Without the tip line, diners can report directly to management to report on the quality of service they received.
Cons of No-Tipping
Removing tipping practices from your restaurant can change the way your entire establishment is structured. That can potentially have negative effects on your business. Here are some potential downsides to a no-tipping policy.
Depending on menu prices, tipped employees might make more in certain restaurants than the hourly wage that would be implemented. At expensive restaurants, even the standard 10-20% tips would equal $20-30 an hour on busy nights.
Transitioning to a no-tip policy often requires an increase in menu prices or a flat-rate service charge to make up for the lost tip income. Raising prices is often a risky business move, and customers might not understand the reasoning behind price increases. Customers don’t want to have to consider fiscal policies when ordering a burger and fries.
Whether or not a restaurant allows tips directly affects the sales tax charged to the customers. Higher menu prices means more sales tax. A service charge may be subject to tax, depending on the state. Tips are definitely not taxed, so the additional sales tax is another cost increase to diners.
Restaurant owners could lose their federal income tax benefit related to tipping. The IRS has ruled automatic gratuities and services charges to be distributed to employees as wages, not tips. When employees report their tips to the employer, the employer is responsible for paying Social Security and Medicare taxes (FICA taxes) on the tip amount. To encourage the reporting of tips, a tax credit is given to restaurant owners for their share of the FICA taxes, which is a dollar-for-dollar reduction of their income taxes. A no-tipping policy would exclude restaurants from claiming the FICA tip credit.
When it comes to running a restaurant, there are many things to consider including supplies, labor costs, and more. Determining if a no-tip model is suitable to your restaurant requires weighing many options and factors. Both employees and customers need to be taken into consideration, and the possible change should be discussed with any business partners and advisers to see if it makes economic sense. Employees should be included in the discussion to see if it is something that would hurt or help the morale of your restaurant.
Rafi Cohen, a graduate of Baruch College & Brooklyn native is the Co-Founder @ Orders2me, an online ordering platform that gives restaurant owners all the features they need to grow their business in the digital age.
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