By Rick Badie
Does it bother you when restaurants automatically add a gratuity to your bill? Come Jan. 1, that may end at many establishments. An IRS ruling that takes effect in January will regard automatic tips as part of wages, which might lead to higher payroll taxes for businesses. In response, Darden Restaurants has nixed 18-percent tipping for large parties at nearly 100 restaurants and may disband the custom completely. Atlanta being a dining city, we explore the issue.
Tips are here to stay
By Todd Semrau
Working for tips has long been an American tradition. For those willing to put up with the long hours, tired feet and crazy cast of characters only found in restaurants, the shift-ending wad of cash was sometimes the only way to pay tuition or rent. But like many good things — early rock n’ roll and pre-cable college football come to mind — the practice of tipping seems to rest on precarious ground.
Mostly due to the Internal Revenue Service’s pending change to how it views automatic gratuities, there’s been lots of discussion in the media and blogosphere lately regarding restaurant tipping. Come January, the IRS will view the 18 percent gratuity added to a party of six or more as income rather than a tip. This means more tax exposure for restaurant owners. Many are eliminating the practice of adding an automatic gratuity or service charge to a bill.
The resulting clamor has opened a broader debate around the practice of tipping: Should it be eliminated altogether? The argument against tipping is that it poses legal and tax issues, especially where management pools tips and distributes them via an employee’s paycheck. Most tips generally stay in a server’s pocket, leaving kitchen staff out of luck.
A few high-profile and independent restaurants have eliminated tipping in lieu of higher wages for staff. That practice has not won widespread industry acceptance. The higher payrolls are tough to swallow for any segment other than maybe upper-end restaurants with higher check averages. Still, other restaurant owners have increased menu prices or added a service fee to offset increased wages. That too has fizzled, confusing customers.
Tipping is subjective and sometimes unfair. It involves money. There will always be someone or some movement looking to upend or change the behavior. In my opinion, tipping is here to say. The brouhaha will blow over. Most restaurants cannot afford the higher wages that would result. And why mess with a good thing? Right now, consumers cover the difference in a waiter’s pay between the $2.13 per hour that most make and the $7.25 minimum wage restaurants would have to pay in a tip-less environment.
What is more likely to happen is that consumers, fed up with having to tip for the hit-or-miss service at their popular neighborhood eatery, will continue their migration to the fast-casual restaurant where tipping is not part of the equation. More and more, diners who see little or no difference in food quality are opting for the limited-service offerings found at these places. As our lives become busier, the occasions for a sit-down, full-service dining experience are becoming less numerous.
Is it possible that it is not the tip going away in Georgia, but rather our local chain steakhouse?
Todd Semrau is owner of Atlanta-based Urban Eats Consulting Group.
Automatic tips protect workers
By David Hayden
Until the federal minimum wage is increased, automatic gratuities are the only protection servers have against losing money by going to work. Let me explain why.
Since 1991, the federal minimum wage for restaurant servers has been frozen at $2.13 per hour. While the federal minimum wage for every other occupation has risen several times, restaurant servers have been excluded. This is because tipping is such a recognized custom that it has been codified into law that a server is expected by the government to receive a tip. Anyone who has ever been a server knows this is not always the case.
While the cost of most everything has increased substantially since 1991, restaurant companies have benefited from this low and stagnant pay rate. Restaurants have passed this benefit on to consumers in the form of prices that have not kept pace with inflation. Restaurants and guests have further benefited from classifying many positions as “tipped employees.”
What many guests do not know is that employees who fill their water glasses, make their drinks, bring their food and clear their tables are also receiving that low minimum wage. A majority of their income is derived from a portion of the servers’ tips.
The cumulative effect of these sub-minimum wage positions subsidizes the price of a guest’s meal. If the hourly wage of all of these employees was raised to the full minimum wage, menu prices would increase substantially. If the federal government and restaurant companies are allowed to pay wages based on the expectation that a guest will tip the server, then it is only reasonable that the expectation be mandated.
A majority of guests uphold the expectation of a tip. Some still do not. While this is often a reflection on the service they received, many times it is not. Out-of-town guests may not see the need to tip at a restaurant they will never return to. A guest may dislike a restaurant’s policy on an issue and decide they should spend no more than they are obligated to. An intoxicated guest who is denied service may refuse to tip out of spite.
Regardless, the result is the same. The guest still enjoys the subsidized price on his or her meal. The server must pay his or her co-workers out of pocket.
A tip should be based upon the service a guest receives. If guests feel the automatic gratuity is too high for the service, they can address this with a manager. This leaves them the recourse of having the automatic tip reduced. If a guest, in spite of the service received, decides not to tip, the server has no recourse.
Given those options, an automatic gratuity is the option that allows fairness for both parties. No server should have pay for the opportunity to wait on a table.
David Hayden, a restaurant author and blogger, lives in Kansas City.
Business as usual for restaurants
By Karen Bremer
Restaurants are a driving force in Georgia’s economy. They provide jobs and build careers for more than 375,000 Georgians, 10 percent of the state’s workforce.
Georgia’s restaurants serve thousands of meals daily across more than 16,000 locations with both tipped and non-tipped business models. Historically, along with flexible work schedules, the opportunity to see the direct result of good service and hard work is what makes a server an attractive profession, and the restaurant industry, an industry of choice for many.
Tips and service charges are customary within the industry. That is why clarity and consistency in tips and service charges are important for employers, employees and patrons.
In June 2012, the IRS issued a ruling to update the treatment of gratuity payments, specifically to delineate when payments should be treated as tips versus service charges. While this IRS action does not change the law or initiate new policy, the ruling implies enhanced enforcement of issues related to tips and service charges. We expect some restaurateurs may, as a result, re-examine how they handle automatic gratuities in light of the rule that takes effect Jan. 1.
By the same token, this is not a new policy. The ability for restaurateurs to determine automatic gratuity practice has not changed in any way. The result of the ruling implementation may simply be business as usual at Georgia’s tipped restaurants.
Regardless of the IRS ruling, it is critical that they maintain the flexibility to implement policies that make the most sense for their business, workforce and customers. In the restaurant and hospitality business, quality and service are everything. Maintaining a culture that puts a premium on those values, and doing so by preserving restaurateurs’ freedom of choice in regard to their tipping and automatic gratuity policies, is of utmost importance to the industry.
The restaurant industry has worked for years alongside the IRS to ensure accurate tip reporting by the millions of employees in the profession — more than 13.1 million nationwide in tipped and non-tipped environments. The industry is committed to continue to do so.
Ultimately, the decisions restaurateurs will make now and well into the future regarding their tip and automatic gratuity policies will be what they view as having the greatest benefit to Georgia restaurants, our employees and our patrons. That’s exactly how things should be in our service-driven industry.
Karen Bremer is executive director of the Georgia Restaurant Association.