The Server Tip Credit Debate: Should Your Restaurant Keep Tipping?

By: Michelle Mire

7 Minute Read

Dec 02, 2016

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restaurant tipping pros and cons

Tips, gratuities, tokens of appreciation… a waiter’s best friend or a blight upon the industry.

No matter what you call them, the practice of tipping has become a hotly contested issue in the world of restaurants and restaurant management. Some argue they are a staple of America's dining culture and give incentive for a harder-working waitstaff, beyond the standard benefits of payroll. Others denote tipping as an obligation that causes both staff and customers unhappiness.

Let's break down the history and modern practice of restaurant tipping by taking a close look at the effectiveness of tipping, the controversial tip credit wage, and what some leading experts have to say about it.

Recent Voices in the Debate

Hillary Clinton called for an end to the tip credit, a federal law allowing employers to credit tipped income toward meeting the minimum wage requirement, at a rally in her 2016 U.S. presidential campaign.

In fact, the National Restaurant Association listed the debate over keeping or ending the practice of tipping as one of the top five big industry trends to watch.

Granted, the concept of the tip credit (an American phenomenon) and the practice of tipping are technically two different (but related) things. However, the crux of the argument — economic fairness – is the same.

The Main Arguments

The Accounting Degree Review summarizes many of the main arguments on both sides of the tipping debate in its highly researched infographic on tipping in the United States.

The Equity Theory — Pro-Tipping

tip credit

Basically, this theory is that capitalism works. The harder you work and the better service you provide, the more tips you’ll earn.

The Counterpoint — Anti-Tipping

restaurant server tip credit

Opponents of tipping argue that a dependence on the culturally expected norm of 15-20% has actually created greater inefficiency and inequality.

Tipping Tip: Did you know that the norm hasn’t always been 15-20%? The rate has been increasing with inflation. In many cases, a 20% tip is considered average. Back in 1922, Mrs. Manners Emily Post wrote, “You will not get good service unless you tip generously — the rule is 10%.”

How the Tip Credit Enters the U.S. Debate

In the United States, most states give employers the ability to count tipped income toward the minimum wage requirement. Here’s how it works:

  • The federal minimum wage is $7.25
  • The maximum tip credit is $5.12
  • Meaning that certain tipped employees are paid $2.13 in wages before tips. (This amount is often referred to by opponents as subminimum wage.)

In theory, the tip credit is intended to benefit both employers and workers by controlling costs and guaranteeing income. In reality, it’s just another layer of legislation in the onion that is tipping.

restaurant tipping regulations

Voices From Every Side of the Table

Just as there are a zillion choices for diners in terms of restaurant style, size, and cuisine, there are an equally infinite number of contrasting opinions on tipping and tip credit in the restaurant industry.

Danny Meyer, New York City Restaurateur

CEO of Union Square Hospitality Group, Meyer is widely credited as the man who started this latest round of debate when he chose to end the practice of tipping at his restaurants, starting with the upscale Modern located in the Museum of Modern Art (MoMa).

danny meyer tipping "The American menu price structure is completely false, but we’ve been taught to believe that it’s real. What’s happened is that every menu price you see obviously includes every single thing except paying your server. We have been conditioned, after many, many years as consumers, to believe that the $25 chicken entree is $25. And then when we add the tip, we truly feel like it came out of a different pocket. And we don’t put that calculus into it. We’re now asking people to shift that long-held thinking and to take it out of one pocket. It’s the same math, but it’s a very different emotional calculus.” -Freakonomics Radio, March 19, 2016

The National Restaurant Association, U.S. Trade Organization

In response to Hillary Clinton’s call to end the tip credit, the largest foodservice trade association in the world issued the following reply:

“Under the Fair Labor Standards Act no one in the restaurant industry should be making a ‘subminimum’ wage. If an employee’s tips plus their base wage do not equal the federal minimum wage or higher in most states, the employer must make them whole. In fact, our research shows servers make $16 to $22 an hour on average. Tipping is still popular among the American public with over 65% saying they would keep the current tipped model in place (according to a nationwide poll conducted in August, 2015). With over 1 million restaurants nationwide, all with varying concepts, a one size fits all policy is unrealistic. Restaurateurs should continue to have the freedom to choose what works best for their business and their workforce — whether that's keeping with the current tipped model or trying something new.” - Nation’s Restaurant News, March 4, 2016

Michael Lynn, Researcher and Tipping Expert

michael lynn tippingBurton M. Sack Professor in Food & Beverage Management at the Cornell University School of Hotel Administration, Lynn has written more than 50 research publications on tipping. In a recent report, he concludes:

“Overall, I come away from the data believing that biggest reason for restaurateurs to replace tipping is that it takes revenue away from them in the form of lower prices and gives it to servers in the form of tip income that is excessively high compared to other restaurant employees. The biggest reason for restaurateurs to keep tipping, on the other hand, is that it allows them to reduce menu prices, which increases demand. Thus, restaurateurs’ decisions regarding whether to keep voluntary tipping should depend on the relative strengths of these potential benefits and harms. The more that a restaurant’s servers are overpaid relative to the back of house and the wealthier and less price sensitive a restaurant’s customers are, the more the owner of that restaurant should consider abandoning tipping." - The Business Case for (and Against) Restaurant Tipping, May 3, 2016

Brinker International, Parent Company, Chili's Bar & Grill and Maggiano's

CEO Wyman Roberts explained why his more than 1,600 restaurants would stick with the practice of tipping:

“We like it (tipping) from the standpoint of it allows servers to really understand the importance of great service and what's in it for them when they provide great service. Right now, we don't think that's where we need to go — especially on a national basis." - Eater, January 13, 2016

Joe’s Crab Shack, The First National Chain to Try Ending Tipping

After only 10 months of its groundbreaking experiment, Joe’s Crab Shack reinstated tipping in a majority of its restaurants. Bob Merritt, CEO of parent company, Ignite Restaurant Group, reflected:

“The system has to change at some point, but our customers and staff spoke very loudly. And a lot of them voted with their feet." - Eater, May 10, 2016 

Canada, That Country North of the 49th Parallel

Canada shares a similar tipping culture with the United States. Like the U.S., tips are also considered income by the national tax authorities. However, in Canada there is no tip credit and most restaurant employees (with certain exceptions) are paid full minimum wage. Although Canadians are reputed to have a slightly more conservative approach to tipping (cheap is such an ugly word), the country is fairly evenly split on how it feels about the practice:

A little under half (45.27%) of voters in their poll supported ending tipping, even if it meant higher prices. Meanwhile, another public opinion poll conducted from May to June 2016 found that “Slightly more Canadians tilt towards maintaining the status quo than ending the tradition of leaving a gratuity.” Global News, October 2015

So Many Factors, So Many Opinions

Whether it’s the nature of the restaurant (upscale or chain) or the social leanings of the individual (free market or fairness), there’s no shortage of voices in this conversation. But now, we turn the table over to you.

Where do you lie on the spectrum of the restaurant tip credit debate? Let us know your food for thought below!

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