Tipping Point: Is It Time to Rethink Gratuity in Restaurants?

Tipping Point: Is It Time to Rethink Gratuity in Restaurants?
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This story appears in the January 2016 issue of Entrepreneur. Subscribe »

American diners really give it to their servers. In New York City and Los Angeles, tips at independent eateries average 22 percent of the check, a big jump from a generation ago, when 15 percent was the norm, according to restaurateurs. Waiters and bartenders often earn more than $50 an hour.

And that has to stop, say a growing number of restaurant owners. Bottom-line necessity and common sense are uniting small family-owned cafes with the country’s most expensive chef-owned dining rooms in a move to abolish tipping.

The restaurant industry is facing a sudden 15 to 18 percent increase in costs, says Kurt Huffman, owner of ChefStable in Portland, Ore., which has invested in 17 chef-owned restaurants and food businesses. The rise in the minimum wage, to $15 an hour in some states, and new laws requiring paid sick leave and healthcare coverage are sending restaurant food costs soaring.

“It’s suicide for most restaurants to raise prices to cover this,” says Huffman, noting that restaurant profit margins tend to hover between 2 and 5 percent.

“There is tremendous concern among our clients,” adds Riley Lagesen, chairman of the National Restaurant Industry Practice Group at law firm Davis Wright Tremaine. “They know increased costs will change their ability to expand and grow.”

Though tips can represent as much as 20 percent of revenue, management can’t touch them -- since 1938, federal law has mandated that tips belong to servers. But fine dining is a highly choreographed experience involving not just servers but also chefs, sous chefs, prep cooks, bussers -- all the way down to dishwashers. Everyone performs a service, but only servers earn a tip.

As a result, there is a shortage of qualified cooks in the big cities. Restaurant owners say they cannot afford to pay them what they are worth, making kitchen work a dead-end career. New legislation is needed to allow full-service restaurants to reduce wages for servers who earn tips, commonly called “tip credits,” Lagesen says.

“It’s ridiculous on the face of it,” says Amanda Cohen, chef-owner of Dirt Candy, a vegetarian restaurant on New York’s Lower East Side. To increase her kitchen staff’s pay, a year ago Cohen took the radical step of abolishing tips and added a 20 percent “administrative fee” to all checks. The change was bottom-line neutral, she says, but a huge step forward for her business. All the money coming into her restaurant is now hers to spend as she wishes.

Karen Hatfield made a similar move at her Los Angeles restaurant Odys + Penelope. Waiters’ wages were reduced to $28 per hour (which Hatfield acknowledges is less than they’d be making if they worked for tips), and kitchen staff wages rose roughly 20 percent.

Restaurateurs applauded when Danny Meyer announced in October that he was eliminating tipping at the restaurants in his Union Square Hospitality Group, instead raising menu prices to reflect the true cost of the meal, including service. “The beauty of Danny’s system is there are no surprises for customers,” says Walter Manzke, chef-owner of Republique in Los Angeles.

Manzke eliminated tipping 10 years ago when he ran Aubergine, the restaurant at L’Auberge in Carmel, Calif. “I saw a real change in the team -- busboys, servers, dishwashers, cooks -- everyone worked together. It was great.” He wants to follow Meyer’s lead at Republique, saying he expects “to lose some customers, but I’ll gain them back eventually with a better staff that operates as a good team, working together to provide better service.”

That’s what Joshua Lewin, chef and co-owner of Juliet in Boston’s gritty Somerville neighborhood, hopes will happen when he opens his cafe this winter with $8 to $15 breakfasts and $20 to $30 dinners, tip included. Serving seasonal, from-scratch cooking, Juliet is designed to be a gathering spot for the community.

“We’re hoping the no-tipping policy will contribute to that environment,” Lewin says. Staff will move between jobs in the kitchen and the dining room, with everyone trained to handle customers.

“I want to make restaurant work a respected career,” Lewin adds, noting that he can provide the stability and loyalty that come with employee training, healthcare and vacations only if he breaks down the cultural walls separating kitchen staff from servers. “These should be long-term careers.” 

Edition: December 2016

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