Is It Time to End Tipping?

Mark Willingham Uncategorized

Is It Time to End Tipping?


Some say tipping is unfair and counterproductive. Others say servers will lose money and service will suffer without it.


Some restaurants have started to move away from tipping, with mixed results.


Source: WSJ

Feb. 28, 2016


It has been the American way for more than 100 years. After eating out in a restaurant, diners tack an extra percentage onto the bill-typically 15% or more-for the waiter or waitress who served them the meal.


But the fairness and future of this entrenched U.S. tradition has been debated in recent months, especially after prominent restaurateur Danny Meyer announced plans to end tipping in favor of higher menu prices at his full-service eateries in New York, including landmarks such as Gramercy Tavern.


The move to ban tipping comes as restaurant owners in some cities grapple with new laws requiring them to pay their tipped employees more hourly, and as the pay gap widens between servers who get gratuities and kitchen workers who don’t. Tipped employees, meanwhile, struggle as they always have with income instability and the whims of the people they serve.


Whether the tip-free trend gains traction, however, remains to be seen. Raising menu prices by 20% or more is fraught with danger, especially for chains that compete on price. And many servers like the current system because on a good night, they can make far above even a $15 minimum wage.


Jay Zagorsky, an economist and research scientist at Ohio State University and a professor at Boston University’s Questrom School of Business, says tipping is unfair and counterproductive for all involved. Michael Saltsman, a research director at the Employment Policies Institute, says bans on tipping don’t benefit servers and may turn off customers.


This past year some of the country’s top restaurants, including those run by Danny Meyer’s Union Square Hospitality Group in New York, announced they were eliminating tipping. This nascent trend is very encouraging because tipping in restaurants is an unfair, counterproductive method of running a business.


For customers, tipping can be confusing and hard to calculate, reducing their overall dining experience. This is especially true for those who struggle with math or have been drinking alcohol. Is the standard tip 15% or 18%? Should it be calculated as a percentage of the total bill or the bill excluding tax? Is alcohol tipped at a different rate from food?


Tipping also allows the restaurant industry to skirt rules on misleading and deceptive advertising. By excluding service charges, establishments can advertise lower meal prices than what customers are routinely expected to pay.


Tipping isn’t only confusing and difficult for customers; it is also problematic for a restaurant’s workers. A dining experience isn’t based solely on the efforts of the servers, but also on the efforts of cooks, the host and even busboys. However, none of these other people are rewarded at the diner’s discretion. A chef who cooks a stunning meal is typically paid the same even if the customer richly rewards the server for the exceptional eating experience. These unequal incentives often result in resentment and large pay inequalities between cooks and servers.


The tip was historically a small token payment, designed “To Insure Promptitude.” Today’s tips, however, aren’t an effective method of motivating servers because they are given at the end of the meal, not the beginning. Incentives don’t work well as a tool for motivation when the server has no idea how large an incentive payment is being offered.


The argument that tips make servers work harder doesn’t stand up to scrutiny. While most of us can recount a time or two when we tipped beyond usual for an exceptional meal or left little or nothing for a horrid experience, most of the time people simply tip the same percentage of the bill, whether the service was good or bad. Research from the Cornell School of Hospitality bears this out and finds “tipping wasn’t significantly related to servers’ or third parties’ evaluations of the service.”


So instead of acting as an incentive, tips simply shift the burden of paying workers from the restaurant owner to the customer. This shifting has become enshrined in labor law. The federal minimum wage states servers need to be paid only $2.13 an hour as long as the rest is made up in tips, ensuring the more customers tip, the less restaurant owners need to pay in wages.


Finally, tipping is unfair to honest taxpayers. In a cash-intensive business such as a bar, not all tips are declared as income. This lowers government revenue and increases the tax burden on all other citizens.


In countries such as Japan and New Zealand, there is no tipping or service charge in restaurants. Instead, servers are paid by the company, and the price of food and drink is adjusted accordingly. Menu prices in both countries are higher, but the average diner’s total bill ends up being about the same. My own experience in both countries is that the lack of tipping has no effect on service.


Yes, there have been a few examples of U.S. restaurants going tip-free and losing servers as a result. But it wasn’t because the staff was fundamentally opposed to the policy change; rather, the restaurant owner made the mistake of paying the servers less than what they had been making with tips, sparking the exodus.


A simple way to encourage more restaurants to eliminate tipping is to require them to pay the prevailing minimum wage to all staff, and not a special subminimum wage for tipped workers. This would incentivize restaurants to eliminate tipping on their own, making eating out in the U.S. a simpler, fairer and more honest system, where the price seen on the menu or advertisement is the actual price you pay.


Restaurant owners in some major cities are facing a dilemma: Recent minimum-wage increases are forcing them to give their best-paid employees (servers) a substantial raise, while labor regulations prevent them from sharing any portion of the gratuity left at the end of a perfect meal with the people who actually cooked it.


Going tipless is intended as an elegant solution to these problems. By eliminating tips in favor of a 20% (or more) price increase, the restaurateur can redistribute money that was previously restricted to serving staff.


While that might be good news for the chefs, it’s as welcome as an undercooked chicken breast for waiters and waitresses-and in many cases, the customers they serve.


Tipped employees stand to lose more than they would gain under this new system. San Francisco restaurants Trou Normand and Bar Agricole estimated they lost 70% of their wait staff during a tip-free experiment in 2015, despite the higher salaries. Owner Thad Vogler told CNN Money that his servers in San Francisco were making as much as $45 an hour with tips, and $20 to $35 an hour without. To stop the bleeding, he brought back tipping after 10 months.


Losing staff is one concern for restaurateurs; losing customers is another. Danny Meyer’s New York eateries are raising prices by as much as 25% to support higher salaries in the absence of tips. Mr. Vogler was reported as saying a whopping 40% price increase would have been necessary at his restaurants to keep servers’ take-home pay the same, while funding raises for the kitchen staff.


To put these higher prices in perspective, consider another San Francisco restaurant, the casual French bistro Zazie. Its menu says you can skip the tip, but that means you’ll pay $19 for three buttermilk pancakes at breakfast, and $34 for your cassoulet at dinner. Across the Bay at Lanesplitter Pizza in Emeryville, Calif., a tip-free model means they now charge $31 for a large pizza with pepperoni and onion. If you grew up (as I did) paying $5 for a basic pepperoni-and-cheese pizza at Little Caesar’s, these new tip-included price levels are enough to do what a New Year’s resolution couldn’t: change your eating habits. That’s a death knell for both chain and independent restaurants.


Customers also may find that they’re paying more for less-as in, less service. The tipped status quo-where servers are guaranteed the minimum wage, but tips can take them far above it-creates an incentive to provide exceptional service to everyone. Without that incentive, service suffers.


Parisian Pascal-Emmanuel Gobry, writing in The Week, described the poor service culture in France, where tipping isn’t a custom: “Here, waiters are almost universally dour, unkind, frequently forget or mess up your orders, and generally scowly.” It is perhaps too early to tell whether this lack of customer service could be exported to the U.S., but the early reviews are worrisome. “While the food was great, our service was next to nonexistent,” said one customer of a Seattle restaurant that went tip-free. “We all wondered if this was a result of the new tips-included policy.”


But what about the cooks, you ask? The fact that servers’ pay is rising while the kitchen staff’s stagnates is a consequence of laws that prevent restaurant owners from counting tips as income, and from sharing those tips with nonservers. The way to “fix” this isn’t to do away with tipping, but for states to follow the IRS in treating tips as income, while relaxing laws on how gratuities can be distributed.


Which brings us to the last, and perhaps best, reason to preserve the status quo: Most servers and customers like it.


A recent survey of 3,000 U.S. consumers by Horizon Media found that a whopping 81% prefer the status quo to a tip-free alternative. My organization used Google’s Consumer Survey tool to poll roughly 2,500 self-reported restaurant employees who earn tips, and nearly 60% rejected even a $15 minimum wage if it meant they would no longer receive tips.


These poll results bring to mind an old saying: If it ain’t broke, don’t fix it.