Eye on Hospitality: Service Charges – Another Response to Tip Pooling Uncertainty

Eye on Hospitality: Service Charges – Another Response to Tip Pooling Uncertainty

By Paul Schlienz

Continuing our discussion from last week, restaurateurs are responding to uncertainty about mandatory tip pools in a variety of ways.  One response is to get rid of tips all together and move over to service charges.

Federal law defines service charges as a compulsory charge for service.

Among the restaurants that have taken this step are Seattle’s largest group of upscale eateries, the Tom Douglas Restaurants, which replaced gratuities with a 20 percent service charge, in 2016, following the institution of a higher minimum wage in Seattle.

“We were hoping it would go well, and it has,” said Devony Boyle, human resources director at Tom Douglas Restaurants, when speaking on an HR panel at the 2016 Northwest Foodservice Show. “We have had very little negative feedback from our guests.”

The company sees advantages for the servers under this model.

“With the service charge model, the money goes directly to the company, so we are able to equitably distribute it rather than having our employees at the mercy of a tip,” said Pamela Hinckley, CEO of Tom Douglas Restaurants. “Servers also get commissions, and the rest of the staff gets revenue sharing. This is a much more predictable compensation model for our employees.”

Another upscale restaurant group that switched from tipping to service charges, in 2016, was Seattle’s Sea Creatures group.

“Our employees have either seen their wages stay the same, in the case of front-of-house workers, or increase, in the case of back-of-house workers,” said Jeremy Price, co-owner of Sea Creatures. “Employee reactions have ranged from ambivalent to elated, depending on their level of agreement with our rationale for changing the system and how their take home pay has been affected.”

There was also something else that sweetened the pie.

“It should be noted that we made the move away from tipping at the same time we began offering health insurance to all employees working 25 or more hours a week and a matching retirement savings plan for all employees working 20 or more hours a week,” Price added. “This certainly factors into our employees’ view of the service charge.”

Before making a change in tipping or tip pool practices, it is wise to get legal advice to confirm that the approach and communication strategies you are adopting will pass legal muster.

A few things to keep in mind if you decide to go this route:

  • Service charges are not subject to the income tax credit available for tips (for all FICA payments made on tips employee earned and reported above the tips needed to meet the tip credit).
  • Initiative 1433, passed in 2016, expressly states that service charges (or tips) paid to an employee are in addition to, and may not count towards, the employee’s hourly minimum wage requirement.
  • Service charges are subject to sales taxes and B&O taxes.
  • To help avoid potential employee claims, such as unpaid wages, breach of contract (express or implied), or unjust enrichment, employers should consider advising employees in writing as to whether and to what extent service charges are paid to employees, and to obtain written acknowledgment regarding the same.
  • Under Washington state law, employers who impose a service charge “related to food, beverages, entertainment, or porterage provided to a customer” must disclose, in an itemized receipt and in any menu provided to the customer the percent of the service charge that is payable directly to the employee or employees serving the customer.
  • The Washington State Attorney General has issued guidelines on service charges suggesting disclosure on websites (in addition to menus and itemized receipt) and to avoid misleading the public as to how much employees receive.
  • Washington law also requires restaurants to expressly state what percentage of the service charge goes directly to service staff. Many restaurants try to say that 100 percent of their service charge goes to employees in the form of wages and/or benefits, but such a statement misses the point in that it does not state how much goes to service staff
  • Service charges are an employer’s property to do with as it deems, except for any percentage the employer has disclosed is directly payable to the employee or employee servicing the customer. Under I-1433, employers must pay all service charges to employees except those that are itemized as not being payable to the employee or employee servicing the customer.

Before making a change in employee compensation practices, it is wise to get legal advice to confirm that the approach and communication strategies you are adopting will pass legal muster.

Stay tuned for more Eye on Hospitality articles on tipping alternatives.

Read more
Categories: News Room