Tipping the Scales: The State of the Country's Most Contentious Restaurant Practice

Some want to do away with tipping, while others fight to protect it; federal and state legislators are eyeing it. Where are we now, and how did we get here?
Tipping the Scales: The State of the Country's Most Contentious Restaurant Practice
Restaurants around the country are wrestling with how to pay workers a fair wage. (Shannon O'Hara)
Jun 28, 2018

Washington, D.C., voters went to the polls June 19 and approved Initiative 77, a local ballot measure that will eliminate the tip credit. A tip credit allows restaurant owners to pay their employees less than the standard minimum wage, as long as the tips earned by the worker bring their income up to the minimum wage or more. The D.C. measure will gradually raise the city's $3.33 per hour tipped minimum wage to the current local minimum wage of $12.50 per hour (and up to $15 by 2026).

Raising wages tends to be a universally popular proposal among workers, but nothing is simple when it comes to tipping. Some believe the new law will actually lower people's pay. The D.C. vote is just the latest salvo in a growing battle over a centuries-old practice. Should tipping end? And what is the best way to ensure that the people who serve us—the waiters, bussers, sommeliers and the chefs and dishwashers in the kitchen—make a decent living?

How do you feel about tipping? Take our poll!

New York could be next

New York state is the next battleground. Gov. Andrew Cuomo has proposed a review of New York's tip credit, and hearings happened throughout the state in the last few weeks, spurring restaurant workers, owners and advocates to testify. (Gov. Cuomo's office could not be reached for comment for this story.)

Twenty leading New York restaurateurs sent a letter to Gov. Cuomo this week calling for change. "Tips can act as an incentive or bonus for exceptional service but should not be a substitute for the living base wage that all workers need," they wrote.

But others oppose eliminating the tip credit. "Restaurants operate on very thin profit margins and an additional increase in the tip wage that would go to employees, many of whom are making two or three or four times the minimum wage, would put extraordinary financial pressure on small businesses," said Andrew Rigie, executive director of the NYC Hospitality Alliance.

In a restaurant where large checks and robust tips are de rigueur, being a server can be lucrative. And the higher-end the restaurant, the more staff earn in tips. Some fear that if workers were paid the minimum wage, customers would tip less or stop tipping altogether—either because of increased menu prices to pay for the raise or an awareness of the increased pay—ultimately bringing down overall pay.

Employers themselves could end the practice, too. "There's no incentive for the employer to have tipping in the restaurant if everybody's a minimum-wage employee," said Melissa Fleischut, president and CEO of the New York State Restaurant Association. "Tracking tips and keeping track of all the tip laws is a lot of paperwork." Fleischut and Rigie estimate that labor runs 30 to 40 percent of a restaurant's costs, and opponents of the proposal think that a pay increase will result in businesses having to lay off staff or close.

Fleischut notes that workers are well-compensated through the tip model for working nights, weekends and holidays. "If they were to lose tips in exchange for minimum wage, they could go work somewhere else that's an easier job with more time off and different hours, and still earn minimum wage," she added.

Maine approved a similar ballot measure in 2016, effectively eliminating the tip credit, but restaurant employees saw a decline in their pay, apparently because diners stopped tipping. They went to the legislature to have it overturned and Gov. Paul Lepage signed a tip credit restoration bill in June 2017.

But several states in the U.S. operate without the tip credit: California, Oregon, Washington, Nevada, Montana, Minnesota and Alaska, as well as Arizona, which approved the proposition in November 2016. "We find that [these states] have higher restaurant sales per capita, higher job growth in the industry, higher job growth among tipped workers, and higher rates of tipping," said Saru Jayaraman, cofounder and president of Restaurant Opportunities Center United.

She said that customers do not adjust what they tip, because few people are aware of the minimum wage differences and it's not what they base their tips on. "In fact, Alaska has the highest tipping average of any state in the United States," she said. In New York, the tipped minimum wage has gone up too over the years, "but tipping has remained exactly the same in New York," she added.

A dark legacy

While proponents of the tip credit claim that restaurant workers are doing just fine and earn much more than the minimum wage with their tips, it's not that simple. Yes, some servers at expensive fine-dining restaurants can make six-figure incomes, as the tips they receive are based on very high check totals. But for a server in a small market or one who works at a more casual or chain restaurant, making ends meet is often a struggle.

Jayaraman argues that the problems of the tip credit are best understood by looking at its origins. Tipping can be traced back to feudal Europe—it was an extra given from a noble person to someone of lesser status. The practice spread to the U.S. in the latter half of the 19th century as wealthy Americans traveled in Europe and brought the custom back with them. By then, she says, the custom was that business owners did not pay service-industry workers—customers did so through tips. Populist resistance to tipping soon grew in Europe, led by labor unions, who argued that anyone should be able to get good service regardless of how much they can afford to tip and that employers should pay their workers.

But tipping, the act of voluntarily gifting a sum of money for a service rendered, remained in America. The timing is key to understanding why: Tipping arrived right around the time of emancipation. Some industries, including restaurants, lobbied for the right to hire newly freed slaves for $0 an hour, making them live solely on tips.

Shannon Sturgis
Danny Meyer believes tipping makes hospitality a dead-end job for many.

Decades later, the New Deal resulted in the Fair Labor Standards Act of 1938, which established a minimum wage for most workers (25 cents at the time)—except tipped employees, who could still receive nothing from their employer, as long as their tips brought them to the full minimum wage. Since then, the tipped wage has inched from nothing to the current $2.13 an hour at the federal level (some states have higher minimums).

Some opponents argue that tipping can lead to unchecked discrimination and abusive behavior by customers. Many studies have shown that people of color are systematically tipped less than white coworkers, and the need to make good tips can pressure a server to tolerate inappropriate behavior. "A woman who gets a full wage from her boss doesn't have to tolerate anything and everything to feed her family," said Jayaraman.

"I think we as an industry can do a better job," said Fleischut, noting that owners and managers need to support their staff when they feel the need to walk away from a table because of harassment. But she doesn't think eliminating the tip credit gets to the root of the problem. "We have seen that sexual harassment, as part of this 'Me Too' movement, has cut across people of all socio-economic backgrounds. Actresses making millions of dollars per picture are also being subjected to this," she said.

Can restaurants survive without tips?

Danny Meyer, CEO of Union Square Hospitality Group (USHG), sums up his thoughts on tipping this way: "You know those menu prices we have? They cover everything. They cover the rent, the insurance, the tablecloths, the flowers, the cooks, the reservationists, the food, the wine. By the way, though, you can pay for our waiters and waitresses," he says sarcastically. "It makes zero sense to me whatsoever."

Meyer became the face of the no-tipping movement when he announced in 2015 that he would ban tipping entirely from his restaurants. He says his goal is to professionalize the industry, giving his employees the same benefits and opportunities other businesses do, making hospitality a stable career.

His most pressing concern, however, is the disparity in wages between the kitchen and the dining room. In his 30 years as a restaurateur, he says, he has seen tipped employee compensation go up 250 to 300 percent, while non-tipped employees' pay has gone up 25 percent. "I looked at these incredibly well-educated cooks in our kitchen, many of whom had all kinds of debt from going to culinary school, who were in many cases making less than $15 an hour," he said.

Meyer saw other problems with the tipping system, like the fact that the only way tipped employees can get raises is through longevity at the restaurant, which can gain them more lucrative shifts, like Friday and Saturday nights. And promotion to a salaried, managerial position typically comes with a pay cut. "I love that our industry welcomes so many people as a first job; I don't love that our industry prevents people from advancing in their careers," Meyer said.

The "Hospitality Included" program, as USHG calls it, has been tweaked since its introduction, but the basic premise is that every restaurant employee is paid an hourly wage, and the dining room staff gets a revenue share—like a sales commission on the earnings of the restaurant on the night they worked a shift. At two restaurants, Gramercy Tavern and Maialino, the revenue share extends to the kitchen staff also. Gratuities are not accepted.

The menu prices went up as a result of this change. It was a challenge: When originally tallied up, Meyer said the changes he wanted to make cost 32 percent more. But he says diners are happy overall. "Our guests have actually been incredibly grateful for this. They love that after drinking a bottle of wine, or two, they don't have to do math."

Meyer's restaurants aren't the only ones trying to end tips. An employee at another fine-dining, service-included Manhattan restaurant, who requested anonymity, explained, "Our staff is paid a livable wage—that's how we describe it," he said. The dining room staff is paid between $15 and $20 an hour. Guests can choose to leave an optional gratuity, which is divided up among front of house staff.

A difficult transition

But the challenges of changing when the competition has not are daunting. "I thought this was the way the industry was going," said Thad Vogler, owner of Bar Agricole and Trou Normand in San Francisco, who eliminated tipping completely at both restaurants at the beginning of 2015. Tracking tips and taxes on them was a headache, he said, but more important, the minimum wage had been increasing locally, which was wedging a bigger and bigger gap between the cooks and the dining-room staff. "Your waiters make $50 an hour, cooks make $20. Frankly, it's not sustainable," he said.

Vogler raised all of his menu prices by about 21 percent, which was the average of reported tips, and took 10 percent of that and shared it with the back of house. "So off we went, and everyone was excited about it. We thought the company culture was strong enough," he said.

The dining room staff saw their wages go down—it was expected, but reality soon set in. "They still made good money," Vogler said, "but ultimately, it was hard for them not to go to another place where they would make $50 an hour. It was really as simple as that: 'No hard feelings, I love what you do, we love the culture, but I'm 25 and my rent is particularly high, living in the Bay Area.'"

The restaurants went through three rounds of turnover. Vogler's managers grew stressed. Training new people is expensive and a lot of work. By the end of 2015, both restaurants reverted back to a tipping model.

Staff retention was a problem at USHG too. Meyer said the company's turnover rate spiked in 2015 when they first announced the policy, however, he claims the current turnover rate is lower than it was in 2014. He also said that people who replaced the departing staff "were attracted to the restaurant specifically because they wanted to work in that kind of a restaurant."

One former USHG front-of-house employee who requested anonymity went through the transition and remembers his pay after the switch was "between 4 to 10 percent less a week, which doesn't sound like a lot, but adds up very quickly. Let's say an extra couple hundred dollars a week," he said. He also soon realized that he couldn't count on the high peaks of the busy season: Around the end-of-year holidays, restaurants are busier and diners tend to be much more generous with their tips.

Evan Sung
Restaurant owners aren't sure how to fairly compensate kitchen staff, who are largely forbidden from sharing in tips.

Overall, he liked the no-tipping model in theory, particularly in terms of equalizing wages, but in practice, there were kinks to work out. This wasn't his sole reason for leaving the company—he was ready for a new challenge—but he did take it into consideration.

At the end of the no-tipping experiment at Vogler's restaurants, a friend told him: "'You know, we're not in this business to be innovative on the level of accounting. It's hard enough to be innovative in terms of food and beverage and service.'"

What now?

Activists have long lobbied legislatures at the federal and state levels to pass what they see as protections for restaurant workers. D.C.'s Initiative 77 to eliminate the tip credit was just that, as is the current push in New York state.

But some think that eliminating the tip credit is going after the wrong problem. Notably, it doesn't solve the wage disparity between back of house and front of house. Andrew Rigie of the NYC Hospitality Alliance actually thinks this pushes it farther apart: When the tipped minimum wage has increased in the past, restaurants have raised their menu prices, making the average checks higher, and therefore the tips higher, while kitchen hourlies have remained the same.

"Gov. Cuomo can simply change the state law to allow tips to be shared with back-of-house workers, who are key in creating the overall guest experience and therefore should be entitled to part of the tips," said Rigie.

Until recently, federal law prohibited tips from being shared with the kitchen. President Donald Trump's administration made changes to the Fair Labor Standards Act in March, allowing sharing while barring management and ownership from partaking in tips. The amendment effectively rescinded a 2011 mandate that tips cannot be shared with back-of-house employees.

But there's a catch: Restaurants can only do this if they pay all their employees the full minimum wage, without taking the tip credit.

Not all states will be able to take advantage of this new regulation either, as some local and state laws specifically prohibit tip sharing, including New York. And distributing these tips to the kitchen is still at the restaurant owner's discretion. Will restaurants institute the change? The model still effectively cuts front-of-house employees' pay in order to distribute wealth more equally, as opposed to the restaurants giving their back-of-house staff a needed raise.

The industry remains divided on the possible solutions. Even diners are divided on whether they prefer tipping or paying higher menu prices for their meal.

To completely change the wage system in which you operate, you need a lot of revenue to handle the risk. Meyer concedes that the no-tipping model is very hard for smaller businesses, and as passionate as he is about his quest, he says he doesn't want to proselytize about how other people should run their restaurants.

"But I do believe change will happen," he added. "Every time the minimum wage goes up, the consumer is going to be paying not only higher menu prices, but then will be adding a tip as a multiplier. I think that non-tipping restaurants at a certain point are going to appear to be a better dining value with happier employees." The question is, when?

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