Restaurant Tipping: How EMV & Danny Meyer Spell Its Demise

By: Allie Tetreault

11 Minute Read

Feb 12, 2018

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At the turn of the 20th century, American citizens turned their nose up on tipping. It created “class” in a country that fought hard to eliminate a “class-driven society.” Six states at the time made tipping illegal, although all laws were quickly repealed in the 1920's. Any guesses why?

Prohibition caused alcohol sales and restaurant's profits to plummet. Ever since, Americans have been encouraged to tip - and to tip generously. 

We've been "tipped over the edge."

While the rising minimum wage affects many back-of-house and front-of-house restaurant employees, it will not affect tipped workers. Median pay for a tipped worker, or "subminimum wage," has been frozen at $2.13 an hour since 1991, not even 50% of the standard minimum wage, $7.25.

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This subminimum wage certainly isn't helping tipped foodservice workers. In fact, the poverty rate of tipped workers is nearly double that of other workers. 

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It's also not helping customers, who often feel awkward and uncomfortable buying into the tipping system. (More on that later.)

Who is it helping? Corporations. Business owners. Restaurant owners. You can offset a large amount of your labor costs to customers when tipping can subsidize that extra $5.12 tipped workers are missing. It has become the norm -- and the law -- to pay 1/3 of the minimum wage to the majority of front-of-house employees, with no questions asked.

Well, maybe some questions. In a capitalist, democratic society, it seems contradictory that several foodservice workers should make $2.13 an hour and have their entire income subsidized by the "forced charity" that is tipping. And yet, restaurateurs and customers alike are frightened to adopt a new tipping culture.

In this article, we'll talk about how some restaurants are moving forward when so many factors are changing the perception of tipping in America. We'll include advice for your restaurant, based on what others have done, and have an in-depth conversation in the comments.

3 Factors Changing the Common Perception of Restaurant Tipping

With some restaurants cutting out tips, some customers feeling more and more uncomfortable about them, some restaurant technology solutions impacting the restaurant payment workflow, we may be closer than ever to another shift in America's restaurant tipping culture. Let's explore these three factors more in depth below. 

1. EMV Chip Cards Affect the Tipping Workflow

On October 1, 2015, liability for counterfeit fraud shifted from the banks to whichever party (the merchant or the bank) is incapable of completing an EMV transaction. That means that if your restaurant does not offer EMV-compliant devices that accept chip-and-signature cards, it may be liable for counterfeit fraud. Chip-and-PIN cards have not been rolled out in the U.S. yet.

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However, EMV chip cards affect a lot more than your restaurant's liability: they affect your payment workflow. You need EMV readers to sync up with your POS tablets, but transactions can no longer be processed away from the customer. With chip-and-PIN cards, tipping will have to be processed before, not after, the customer pays the bill.

Here's what it will look like, according to Cardfellow:

  1. Waiter drops off bill
  2. Customer puts credit card into portfolio
  3. Waiter brings a pay-at-the-table POS tablet
  4. Waiter opens check from the terminal and inserts card
  5. Waiter hands terminal to customer to complete transaction (remaining nearby)
  6. Customer adds tip into terminal
  7. Customer enters PIN into terminal
  8. Customer hands terminal back to waiter
  9. Waiter completes transaction, prints the receipt, and delivers to the customer

For now, it's business as usual with chip-and-signature cards. But with chip-and-PIN cards, which addresses lost or stolen cards as well as counterfeit cards, your tipping procedure may change. And on October 1, 2016, all cards, chip-and-PIN or chip-and-signature, will have to process the tip before the card is run, or "dipped."

If you really want to prepare for the tipping change, you may want to read up on how the different credit cards will be able to process tips. Again according to CardFellow:

  • Visa: With Visa EMV chip cards, tips are processed the same as they always have been. Visa is clear that EMV chip Visa cards will not require a change in the tipping process in their guide, Play it Smart With U.S. Chip Payment Transactions.
  • MasterCard: MasterCard recommends that "gratuity be added to the transaction amount before the EMV transaction starts. This will ensure that the final billing amount is both presented to the card during the transaction and displayed to the cardholder at the time of PIN entry (if required)."
  • Discover: Customers must add the tip amount while the card is still in the terminal. This requires the customer to be present at the terminal and to add in the tip before the card is run.
  • American Express: In American Express's guide to implementing EMV acceptance, they recommend to allow the customer to add a tip prior to entering their PIN.

Currently, nothing about your tipping process will change. However, when we move to chip-and-PIN cards, your payment workflow will alter completely. In preparation for this change, some restaurants are doing away with tipping completely.

2. Union Square Hospitality Group Eliminates Tipping at 13 Full-Service Restaurants

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* The Modern, Union Square Hospitality Group's restaurant in The Museum of Modern Art

Danny Meyer, a pioneer in the casualization of fine dining in New York and now the CEO of Union Square Hospitality Group, will eliminate tips at every one of his thirteen full-service restaurants starting in November. This is the first time a "zero-gratuity" will be adopted at a major American restaurant group that includes fine dining and fast casual restaurants.

As a big name in the restaurant industry, Danny Meyer is getting a lot of buzz. But restaurant owners want to know how exactly he will make this work.

First, menu prices will go up. Meyer hasn't revealed by how much, though some speculate up to 35%.

Second, menus will carry a note informing diners of the new policy.

Third, the only charge on the itemized bill will be for sales tax.

Fourth, there will be no space on the check to leave a tip.

Why? Well, there are plenty of reasons. But Danny Meyer focused on one:

"The very first thing that put this into my head was the pain," Meyer recalled. "I’d see nights where waiters were crying because somebody from Europe, where they don’t have a tipping culture, would walk out without leaving a tip." 

 "I'd see nights where waiters were crying because somebody in Europe would walk out without leaving a tip." - Danny Meyer
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This again points to the corruption of the system. When tipped workers are dependent on an optional custom, a system customers know is to blame for the disparity between the kitchen and the server, they suffer. 

The decision to eliminate tipping might affect profits and hiring in a big way. With higher menu prices, restaurant sales and menu item popularity may decrease. Menu engineering, or using data to determine the stars and dogs on your menu, could help you redesign your menu to show each menu items' value. You could also make it clear on your menu that customers will not be paying a 20% tip on the bill, and therefore may be saving money. 

In terms of hiring and recruiting, Danny Meyer's restaurants will be able to recruit cooks and servers alike at a significantly higher rate of pay than non-tipped restaurants will be able to offer. To compete in hiring, the only option a restaurant will have is to shift to a similar model.

What does this mean for the service? If servers know they will be paid no matter what, won't they work less hard? Not if you create a culture that puts restaurant employees first. You may also want to screen for people looking for a more stable wage during the hiring process. 

Overall, this ambitious game-plan was definitely a bold move in Danny Meyer's case. However, it's the move he felt he had to take in order to "right a labor of wrong," a system of oppression that has gone on for far too long. 

3. Tipping Suggestions on Restaurant Tablets Make Customers Feel Uncomfortable

At fast-casual restaurants, quick-service restaurants, cafes, and bakeries, the move to POS tablets has also changed the tipping workflow: namely, instead of leaving a tip in a jar, customers are encouraged to tip via the tablet.

A recent Boston Globe article pointed to the awkwardness of having a server look on as you choose whether to tip or not to tip.

First, to be fair, the server also looks on when you decide whether or not to put some cash in the tipping jar. But in that situation, there is no "opt-out" button.

Commenters on the Boston Globe article claim that tablet technology makes them more uncomfortable and less likely to tip, especially when given the option of pre-calculated tips for 10%, 15%, and 20%. However, findings from a recent Software Advice survey showed that most customers would tip either way:

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Via Software Advice

A combined 41% of respondents said that, when a server is looking on, there is more of a chance that they would tip. However, another 41% said that the server's proximity would have no impact. 

In fact, the conclusion of many of these reports was that people "would tip either way." For example, if there's an opt-out button to press - "No, I would not like to tip" - 50% of respondents said that it wouldn't affect their reaction.

It's tough to call, but at some restaurants, especially smaller ones, restaurateurs are doing away with tipping through tablets. The Chubby Chickpea food truck, for example, implemented a workaround to avoid confronting customers with a tip screen on the tablets. 

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Why You Might Want to Consider Eliminating Tips at Your Restaurant

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The fact of the matter is that paying tipped worker does not hurt restaurants' bottom lines. Labor costs, while important, are not your make-it-or-break-it metric; that is food cost percentage. Smart menu pricing to offset labor costs makes sense when customers realize they're no longer being asked to tip 20%. 

To combat the abuse of restaurant tipping, the simple answer would be to change the system to an hourly wage and make tips an extra reward for high-quality service, not something foodservice workers have to rely on. In theory, this sounds ideal, especially because it's how European countries operate. But with our history of abusing restaurant tipping, I think that Danny Meyer's "cold turkey" approach is best.

Don't believe me? Here are three restaurants, besides the holy grail of the Union Square Hospitality Groups, who have eliminated tipping successfully, as featured on Restaurant Business Online:

  • Packhouse Meats in Newport, Kentucky bans all tipping within his restaurant; there are signs on the walls that tipping isn't allowed, cash tips are returned, and the credit card receipts don't have a tips line. Instead, his servers have two choices, which they can pick between at the end of every shift: they can take a flat $10/hour rate (low, but not as low as $7.25 or god forbid $2.13) or get paid with a commission of 20% of their food sales. The choice is up to them. 
  • Ivars, a Seattle seafood staple, raised prices 21% and put an end to tipping when the city passed the minimum wage increases in April. Ivars skipped the multi-year ramp period for employers and bumped all workers making less than that to $15 right away.
  • Coi in San Francisco levies an 18% service charge to be shared by the entire staff, bringing "the profession back into the bright sun of the professional mainstream, instead of the murky half-light in which restaurants used to exist,” according to chef and owner Daniel Patterson.

Ultimately, it's up to the restaurant owners to decide what to do in this nebulous time for restaurant tipping culture. That's why I want to hear from you. What are your opinions on the restaurant tipping revolution? Will you be eliminating tips, or are you waiting for more results from other restaurants? Leave a comment below.

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