The Implications of Eliminating the Tipped Wage, Part I: A Summary

Brian

What's your opinion on eliminating tipping?

Less than a year ago Danny Meyer of Union Square Hospitality Group announced that he would be eliminating tipping at 13 of his New York City restaurants. He implemented this shift by raising menu prices and informing his guests that these higher prices now include a charge for hospitality. While some establishments had already eliminated tipping and some social advocates had been for some time calling for its elimination, Meyer’s decision was like a shot across the bow of the entire industry. Meyer is one of the most successful restauranteurs in the nation and an icon among operators. His advocacy made an industry-wide shift in the way we compensate our employees seem possible…or even inevitable.

At the time we published a comprehensive summary of the issues likely to have an impact on the establishment of public policy as well as on the decisions being made by operators about their own futures. We drew some conclusions but we were hesitant at the time to draw too many. There is plenty of research regarding the efficacy of tipping from the perspective of the consumer, but this research needed to be evaluated and synthesized. We found significantly less research regarding server attitudes toward tipping and its elimination, a real problem considering this is the group most impacted by this change. We felt the passage of time would also provide some clues about how things would work as the results of early adopters were revealed.

We decided to tackle these issues head on in an effort to best understand the implications of the widespread elimination of the tipped wage. Time has taken care of itself and we have seen results from early adopters. We have noted these results as well as common circumstances where they exist. We have undertaken a review of existing research and evaluated it for application to the current environment. Where we found a gap in the research, we surveyed hundreds of tipped employees and managers of tipped employees to see where they stood on the issue.

We will be publishing our findings in three parts on Nightclub & Bar. This first installment summarizes the factors we have identified as being most significant for operators to consider. Part II will summarize the original research we conducted to assess the attitudes of industry managers and employees toward the elimination of tipped compensation. Part III will combine existing research and information with our own original research and the lessons from the passage of at least a little time to assess the implications of such a change on the industry and for hospitality managers and employees.

Before going any further on this topic, it is important for us to acknowledge the assistance of some individuals and organizations without whose assistance this undertaking would not have been possible. We acknowledge the support and guidance of Robert Gable, Ed.D and Felice Billups, Ed.D. at the Center for Research and Evaluation at Johnson & Wales University, and Kristen Santoro and Ashley Garceau of Nightclub & Bar.

Compensation from tips has long constituted the bulk of pay for dining room and bar staff in the food and beverage industry. Through the years, movements have sought to change this circumstance, characterizing gratuities as undemocratic or even demeaning.  In recent years a few restaurants have implemented a mandatory service charge or eliminated tips altogether, choosing instead to pay their service employees a flat rate. But these establishments have tended to be at the highest end of the industry or located in cities widely identified as hipster enclaves. Taking a quick look around reveals that these efforts have not resulted in widespread changes. Virtually all servers continue to generate their livelihood in the same way their predecessors have for more than 100 years.

Tips Don’t Work

Tip amount has little to do with service quality. In theory, employees working for a gratuity do their best, motivated by the prospect of a large gratuity at the end of the meal. In practice, the size of a tip has less to do with the quality of service provided and more to do with the size of the bill. In his research, Cornell Professor Mike Lynn concludes that customers are reluctant to leave anything less than the normal 20% gratuity for fear of social disapproval, perhaps at the hands of fellow diners or even service staff. A gratuity unlikely to fluctuate is unlikely to motivate.

Tips squelch teamwork. The reward system in place where tips constitute the bulk of pay provides no incentive for working as part of a team. We have all experienced bars and dining rooms filled with mercenaries focused on their customers and theirs alone. Despite your best efforts, “That’s not my section” or “I’ll get your server” remain common responses. Pooling tips among servers can help alleviate this circumstance; but most servers are loath to participate, fearing that the fruits of their efforts are being shared with team members working less hard.

Tips make it hard for managers to manage. Danny Meyer astutely opines that the direct transaction between the customer and the service provider leaves no place for the manager. Eliminating tips puts the manager between these two parties, allowing them to incent and reward excellent performance through pay increases, bonuses and promotions. Meyer is confident that his managers will be better at this than his customers.

Service Charges Don’t Work

High profile operators like Thomas Keller and Alice Waters have eliminated tipping at their restaurants and have instead instituted mandatory service charges. There’s been extensive research on consumer attitudes toward service charges and they conclude that customers don’t like them. Regardless of their unwillingness to tip less than the norm or not at all, customers feel a sense of transactional power where tipping is involved. Mandatory service charges result in the opposite feeling – mandatory means customers have no choice and thus are made to feel powerless. Most people would give their first born to eat at The French Laundry, so being made to pay a service charge is probably not that big a deal. It is a big deal everywhere else.

Higher Menu Prices Don’t Work?

Meyer has stated that he will be raising the prices on his menu by more than 20%. Such an increase might cause sticker shock for some customers. This is not likely to be the case at the Union Square Eateries where customers are drawn by quality and therefore exhibit little or no sensitivity to price. Maybe you run an operation like this, but more likely you don’t. You do a nice job, but still need to provide a value proposition for your patrons. How would they react to your prices increasing by 20% across the board when you eliminate tipping – especially if none of your competitors do the same? Will potential customers looking up your menu on the internet understand what you’re doing or go into sticker shock after looking at your menu and take their business elsewhere?

Danny Meyer has no Choice

Well…clearly Danny Meyer has a choice. He just might not have a better choice. Recent analysis projects a shortage of kitchen workers is coming in the very near future. In New York, where Union Square operates, raising the minimum wage for fast food workers to $15.00 hour won’t make it any easier to find these increasingly scarce employees.

During his 30 years in the industry Meyer has seen wages for tipped employees rise by 200% while those for non-tipped employees have risen 25%. This increase in back of house wages is consistent with wages as a whole. The massive increase in wages for tipped employees is the result in food prices that have risen faster than wages in general and increases in tipping norms from about 15% to about 21%. Tipped employees are getting a much bigger piece of a much bigger pie.

In order to attract employees to the back of his house, Meyer needs to pay them more. For example, at one of his restaurants he expects to increase hourly rates from an average of $11.25 to an average of $15.25. The money for this increase has to come from somewhere. Prices could be increased or lower profit margins accepted. Or a sort of equilibrium could be achieved among staffers by raising some deemed to be paid too little and reducing others deemed to be paid too much. This is the path he has chosen.

You probably don’t operate in a market with a $15.00 minimum wage and so you don’t need to figure out a way to fund a 33% increase in hourly pay without slashing profits or pricing yourself out of the market. Meyer does. Your servers and bartenders probably don’t make $100,000-plus a year. Meyer’s do. His will still be making big money even if they, say, have their pay reduced by $10,000.00. Yours won’t. His best option was eliminating tipping. Is that yours?

What About Servers?

For tipping to be eliminated on a grand scale, this population will need to buy in. Our new research and what is already known about the general characteristics of servers provides some insight into their likely reaction.

Servers are motivated by money. Serving and bartending are tough. The work can be physically demanding, the hours are long, the workweek is unconventional, and the public can be difficult. The primary motivation for doing these jobs is that they pay well. Yes, you need a passion to provide great service, but you could do that at Target without having to clock out at 2:00 AM on a Sunday morning. The sacrifice warrants a reward.

Servers are risk takers. We surveyed some of our students who are professional servers, asking them if they would prefer a steady hourly rate over the uncertainty of tips. All of them indicated they preferred tips, with many mentioning the actual amount of money they can make on a busy Friday. When asked about a dead Tuesday, they again mentioned the bonanza on Friday.

Servers are entrepreneurial. This same group of our students indicated that they worked hard to provide great service and to upsell because of the direct financial benefit to them. They preferred working alone and expected to benefit from their effort. They didn’t expect the house or their co-workers to take what they had earned.

Servers are transitory. So many servers are really something else. They are students paying their way through school, out of work accountants looking to make ends meet until the next accounting job comes along, teachers looking to supplement their incomes or stay busy during the summer. Point is, they are on their way to something else and serving or bartending is a part time gig or temporary weigh station. They want to make as much money as they can until they can move on. This is reality. They are not likely to be interested in professional development, promotion, specialized training, or 401Ks. These items motivate careerists, not transients.

Next Week: The Implications of Eliminating the Tipped Wage, Part II – Server and Manager Attitudes