More Businesses Are Asking Customers For Tips — Should You? Don't Make These 5 'Guilt-Tipping' Mistakes. Tipping can be a great way for your employees to earn more — and to help mitigate your costs. But you have to do it right.
By Gene Marks Edited by Maria Bailey
Opinions expressed by Entrepreneur contributors are their own.
Been to a Starbucks lately?
If you have, then you've now officially experienced their (relatively) new "tip" screen when buying a coffee and it's definitely creating some "awkward" conversations. Before making the purchase, you're given options for tipping the staff. Starbucks, and other businesses big and small, are doing this to help their employees earn more money (and, let's agree) to help mitigate their own compensation costs. You can, of course, choose to select "no tip," but it's downright uncomfortable — for both the customers and employees. Some call it "guilt-tipping."
Tipping has become a controversial issue. It became big during Covid-19 where we tipped just about any hourly worker who was literally risking their lives to provide a service to us while we sat on our couches watching Netflix. But now that time has passed, things can get to normal, right? Wrong! Many businesses are still "strongly" encouraging their customers to tip. So should yours?
Perhaps — perhaps not. To help you figure out this first-world dilemma, allow me to offer my five golden rules on tipping specifically for business owners.
Related: 'Tip Culture Is Getting Insane': Starbucks Customers Furious Over Company's New Tipping System
Rule #1: Don't ask for tips unless you're in the tipping industry
There's actually a red line between industries where tips are acceptable and the ones where they are not. If your business is a restaurant, bar, food service (i.e. bakery or coffee shop), delivery service (i.e. groceries, moving), hospitality, events or in the spa/salon/barbershop industries, or if your business is just you — like a dog walker or house cleaner — then tipping is common practice. With very few exceptions, otherwise, that's pretty much it. Meaning, if you're a manufacturer, commercial service provider, distributor or construction company, you can stop reading now. The rule of thumb is that if your business is business-to-consumer (B2C), there may be tips. If your business is business-to-business (B2B), it's unlikely. Knowing this will save you embarrassment and potential grief from your customers.
Rule #2: Never force tips on your customers
Ever hear of Osteria La Buca, an Italian restaurant in Sherman Oaks, California? It's probably a great place but the attention it got this past January had nothing to do with its food. The restaurant slapped a mandatory "health fee" for its employees on its customers' invoices. The public outcry was — as you can imagine — not the kind of attention they wanted. If you're going to encourage tips, make sure your customers can opt-out. Even Starbucks has a "no tip" button on its point-of-sale devices. In America, people are accustomed to having their say over whether or not they received a good service or not. Telling your customers that tips are required or stating that an "automatic 20% gratuity will be added on parties over 5" is forcing their hand and will cause resentment. Always give customers a choice.
Related: A Unionized Apple Store Wants Customers to Start Leaving Tips for Employees
Rule #3: Never covertly add a tip charge
Every once in a while, I come across a story where some restaurant owner's brain froze and they surreptitiously added a "service fee" or "automatic gratuity" on their customers' bills without any notice beforehand. The practice is common enough that Washington DC's district attorney felt compelled to issue a consumer alert last March as a warning to both customers and businesses. The rule here is simple: Don't do that — unless you enjoy being the target of social media posts comparing you to Attila The Hun, or, worse, his parents.
Rule #4: If you're in a tipping industry, have a very public policy
The reason why there's so much debate around tipping nowadays is that customers don't know what to do. So tell them! Hang a sign with your policy or include notes in your menus or around your place of business. Add a suggestion — not an automatic fee — on your invoice. When confirming prices for a service visit, make sure your salespeople inform the customer that tipping is encouraged, but optional, and the average tip ranges between X and Y. Communicate with your customers, don't sweep this under the table and then put them in an awkward position when it comes time to pay.
Related: Tacking On Additional Fees To Cover Your Costs? Stop And Do These 3 Things Instead.
Rule #5: Track your employees' tip income closely
Tipping is a great way to not only provide more compensation for your employees but to take away some of this burden from you. However, there is still a reporting burden. You need to talk to your software provider — and ask that when your employees receive cash, they let you know — and ensure that you are tracking all tipped income. The IRS recently reminded employers about the importance of reporting all tip income and most states also have reporting requirements. Ignore it at your peril.
The bottom line is that, although most countries don't practice tipping like we do here in the States, the practice isn't going to change anytime soon. In fact, it's growing. In the restaurant industry alone, tips grew by 25% in the third quarter of 2022 according to a report from payment processing service, Square. Most business owners have realized that tipping, when done the right way, can be a good thing both for them and their employees. If you're considering the same for your business, and you want to do it the right way, then all you need to do is follow my five golden rules. That's my tip for you.
