Are Restaurants Approaching a Tipping Point on Wages?
Higher minimum wages pressure restaurants to reconsider tipping practices
By Ann Meyer
Huertas restaurant in New York eliminated tips and increased menu prices to pay workers more fairly. Photos courtesy of Huertas.
Changing an age-old practice like tipping a restaurant server takes a concerted effort, but Huertas in New York City sees plenty of reasons to do so.
With wage disparities getting new attention, Huertas was in the forefront of a “hospitality included” movement designed to compensation workers more fairly. Huertas eliminated tipping in December 2015, when it increased menu prices and added information on its menu explaining the change to a revenue-sharing approach to allow the restaurant to pay its kitchen staff and other back-of-the-house workers more. Workers earn a base of $13 per hour plus a percentage of sales that varies by position, seniority and number of hours worked. Servers earn about $25 to $28 per hours, while cooks get a smaller percentage of the overall revenue.
“Now a percentage of sales is being distributed to the staff on a weekly basis,” says chef-owner Jonah Miller. “We were very careful and thoughtful in how we approached it.”
Another benefit: Pay no longer varies daily for the wait staff. Servers scheduled on a slow Wednesday earn the same hourly rate as those who work on a busy Saturday, and both get an equal share of the week’s revenue. “It’s been successful,” Miller says. “It’s a change we’d like to see more restaurants make.”
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Unbeknownst to most diners, a generous tip can contribute to a wage gap between a restaurant’s front-of-the-house tipped servers and its kitchen and back office staff, who typically are paid a flat hourly rate. With minimum wage and earnings disparities making news, more restaurants are grappling with ways to pay all of their workers fairly. “Restaurants are feeling a dilemma in terms of what is the right path to take,” says Sharokina Shams, vice president of marketing and communications at the California Restaurant Association.
In California, where the minimum wage has increased to $10.50 per hour statewide and to $12 an hour in some areas like Palo Alto, as of Jan. 1, 2017, restaurants face higher labor costs at a time when inflation is low, so raising menu prices can hurt sales by encouraging consumers to skip a meal out and instead cook at home. The California minimum wage is slated to hit $15 statewide in January 2023, up from $9 in 2015 and $8 in 2013.
“Every dollar we pay a service staff, that is a dollar less we have for our nontipped employees,” says Michael Ekwall, co-owner with his wife, Lara, of La Bodeguita del Medio in Palo Alto.
The extra dollars Ekwall must pay to servers isn’t fair to other workers whose wages won’t catch up. “That really is our biggest challenge,” Ekwall says. “Not one of my colleagues was against the minimum wage; we were just asking for an exemption for the tipped employee.”
Located in an affluent area near Stanford University, La Bodeguita’s patrons most often tip 18 percent or 20 percent, according to Ekwall’s analysis. In fact, so many diners tip above 15 percent that Ekwall opted to use 18 percent as the starting tip amount computed in print on the credit card slips customers receive, though customers are welcome to tip any amount.
Most point-of-sale technology providers now offer restaurants the option of including suggested tip amounts on restaurant checks, experts say. Nine out of 10 restaurants using Action Systems Inc.’s Restaurant Manager and Duet POS systems provide three suggested amounts, designed to reflect “OK,” “very good” and “excellent” service, said product manager Jay Shavitz in emailed responses. The feature has been available on Restaurant Manager since 2006.
While diners might assume the tips they provide will be spread among all workers, federal Department of Labor regulations specify tips belong to the worker who receives them. (See box)
Diners aren’t the only ones who don’t understand the issue, Ekwall says. Lawmakers don’t get it, either. “It’s so complicated for the political people we’ve talked to. They don’t even know the problem exists,” he says.
Most states allow a “tip credit” to be used toward the minimum wage for servers — to reduce the amount of money restaurants have to cough up from menu receipts to pay minimum wages — but laws in California and six other states explicitly prohibit tip credits, Shams says. In addition, many states have lower minimum wages for tipped workers, but in California, tipped servers must earn the same minimum wage as all other workers. The Labor Center at the University of California-Berkeley provides information on minimum wage ordinances in most U.S. cities. The U.S. Department of Labor provides information on compliance.
Some restaurants have added surcharges to cover their higher labor costs. “A service charge belongs to the house. It is taxable, and the house can choose how to distribute that money,” says consultant Joan Simon, founder and principal at Full Plate Restaurant Consulting.
But many consumers prefer tipping to a service charge because they like having a say in how much extra to provide, Shams says. Increasing prices in a restaurant where tipping is expected won’t solve the wage gap. “You’ve raised the cost of the meal and you’ve done nothing for the person who has cooked the meal,” Shams says.
Reducing support staff also won’t address the wage gap in restaurants, says Dave Donaldson, senior consultant at California Restaurant Consulting. Servers will keep more tips because they have fewer positions to share the tips with. To reduce the need for servers, restaurants are reconfiguring their layouts so customers line up to place orders. “It’s the labor rate that is driving this,” he says.
In many states, restaurants can use the tip credit and encourage more tip sharing to support higher pay for more workers. “If you can extend the tip pool to the back of the house, it does relieve the restaurant from the labor pressure,” Donaldson says.
But Donaldson says eliminating tipping altogether like Huertas has done is perhaps the best long-term solution. It works in Europe, he says. “Having seen it work so well over in Europe, I would like to see it here.”
Facts About Tips and Tip Credits
The Fair Labor Standards Act provides the following federal guidance on employers’ permitted use of tips. However, state rules can supersede the federal tip rules, so check with your state or consult an adviser for more information.
1. Tips are the property of the employee.
2. An employer in most states can use tips received by an employee as a credit against the minimum wage obligation to the worker, providing the employer informs the worker of this practice upfront.
3. Tip credits are computed by subtracting the minimum required cash wage for tipped workers from the minimum wage in a given area. For example, if the minimum cash wage is $3 and the minimum wage is $7.25, the amount of tips that could be applied to the worker’s hourly wage is $4.25.
4. An employer can use tip pooling to spread tips among workers who regularly receive tips, provided the employer notifies tipped employees of a required tip pool amount upfront.
5. Employers are prohibited from retaining an employee’s tips for any purpose other than a tip credit or tip pooling.
For more details, see the Fair Labor Standard Act’s rules for tipped workers in Fact Sheet #15, available at https://www.dol.gov/whd/regs/compliance/whdfs15.htm