Lessons in No-Tipping

Lessons in No-Tipping

By Paul Schlienz

Your minimum wage is going up. How are you going to make it work?

This is the question restaurateurs have been asking themselves in Seattle, SeaTac and now Tacoma where local ordinances are pushing the minimum wage significantly higher than the state minimum wage. And with a statewide $13.50 an hour minimum wage initiative expected on the November ballot, it’s a question for the entire industry.

There is no one right answer, no tried and true rulebook to follow and no restaurant operations guru who can give you the one-size-fits-all formula. However, given the industry’s notoriously narrow profit margins, getting the balance right between wage increases for employees and increased costs to consumers is a must, not an option.

Fortunately, we have pioneers in the brave new world of higher wages who are learning what works best for their guests, their entire staff and their ability to generate a profit.

Some restaurants are switching from tipping to higher overall costs. Others are moving toward service charges instead of tips. Some have even tried service charges and gone back to tipping.

Regardless of the approach, a common thread that runs through these restaurant operators’ thinking is that changing the

ir compensation models away from tipping creates an opportunity to address front- and back-of-house pay equity.

The Ninth Circuit’s tip pooling ruling in February, which bars “customarily non-tipped employees” from employer-backed tip pools, gives even greater impetus to reevaluate the tip model. (Learn about the implications of the ruling and the WRA and its co-plaintiffs’ petition to have the court review the decision at wra.cc/mag0516c).

Another thing these operators all have in common is that they put serious thought into their response to higher wages before making their move. This, after all, is not a decision to be taken lightly.

“Be very careful and do your homework,” said Pamela Hinckley, CEO of Tom Douglas Restaurants, Seattle’s largest upscale restaurant group. “It’s very expensive if you don’t get it right. Before you decide what you’re going to do, run some different compensation models and see what impact higher wages will have. We want to make sure we get it right. That’s why we’re going slowly.”

SERVICE CHARGES

Tom Douglas Restaurants replaced gratuities with a 20 percent service charge at Dahlia Lounge, Palace Kitchen and The Carlile Room in February.

“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 in March. “We have had very little negative feedback from our guests.”

As a result, Tom Douglas’ other high-end eateries also eliminated tipping in favor of service charges in mid-April.

“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 Hinckley. “Servers also get commissions, and the rest of the staff gets revenue sharing. This is a much more predictable compensation model for our employees.”

For Renée Erickson’s Seattle restaurants – The Whale Wins, The Walrus and the Carpenter, Barnacle, Bar Melusine, Bateau, General Porpoise Coffee and Doughnuts – there were additional reasons the company moved to service charges after Seattle’s minimum wage increase.

“We had been wrestling with the issue of tipping for years and have reached a point where we are resolved to move away from tips,” said Jeremy Price, co-owner of Sea Creatures, the umbrella company for the Erickson restaurants. “We understand that our people deliver great service because they are professionals.”

He does not believe workers in the service industry need to be incentivized by tips to perform their jobs well. “The correlation between service quality and amount tipped is almost nonexistent,” he said. “Multiple peer-reviewed studies support this position. Compelling arguments can also be made that the practice of tipping has sexist, racist and xenophobic dimensions – on both sides of the exchange.”

As with Tom Douglas’ eateries, the Erickson restaurants also liked the amount of control an employer has over service charges versus no control at all with tipping.

“We reject the idea that our customers are best positioned to control the amount our employees are compensated,” said Price. “Service charge dollars are treated differently than tip dollars by the law. Service charge dollars can be distributed to our people as we see fit.”

Price and his colleagues also saw service charges as a way to encourage its best employees to stay with the company for the long haul.

“We believe in creating workplace environments where professionalism and careerism are encouraged and where mutual respect between our people and our guests is nurtured,” said Price. “After much consideration, we are convinced that tips don’t really fit with this goal. These concerns coincided with Affordable Care Act, the Seattle Minimum Wage Ordinance and legal rulings on the Fair Labor Standards Act to create a situation where moving away from tipping was absolutely necessary for us.”

So far, employees are generally happy with the new system.

“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 Price. “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.”

And there was no rebellion from the guests.

“The vast majority of our customers do not care or have not noticed,” said Price. “The small minority that does have an opinion is overwhelmingly pro-service charge. We hear, ‘I would have tipped more’ quite a bit. Many of our guests are familiar with service charges from their travels to other countries. Every now and again, we do get someone who disagrees with the policy. Generally, the objection is to the compulsory nature of the service charge. This has happened a handful of times in what is closing in on a full year.”

GRATUITY INCLUDED

Seattle’s famous seafood chain, Ivar’s, took a completely different route in response to the city’s minimum wage ordinance. Rather than follow the city’s phase-in schedule to reach $15/hour over four years, Ivar’s approach was to bring all employees at its full-service eateries in Seattle to $15 on April 1, 2015 by eliminating tipping, and it raised prices in order to do so.

That price increase at its Acres of Clams and Salmon House restaurants incorporates a moderate labor increase of 4 percent and well as a gratuity average of 17 percent based on the company’s historical guest data. On top of the $15 an hour wage, Ivar’s shares the increase in menu pricing with all hourly employees. So, hosts and hostesses, bussers, cooks, dishwashers, servers and bartenders all benefit.

“We saw Seattle’s $15 minimum wage law as an opportunity to right some of the serious discrepancies between the back-of-house and front-of-house,” said Bob Donegan, president of Ivar’s. “We asked ourselves if we could reallocate our revenue model and bring up everyone’s income, especially raising kitchen salaries. And it worked. By going to a tip inclusive model, we took all hourly employees to a minimum of $15 an hour immediately and put all the hourly staff on a revenue sharing system which distributes the funds so the entire team shares in the success of the restaurant.”

And how did Ivar’s employees respond?

“All of our employees are doing better under the new system,” said Donegan. “We now have 21 percent more revenue to share with our employees, and none of this new revenue goes to the company. We have only lost one server over this issue, and he has asked for his job back.”

One change Ivar’s did make after instituting its price increase was related to that tried and true American tradition of tipping.

“About two weeks after we took the tip line off of our checks, we added it back because guests were saying, ‘We get it. You’re taking full responsibility for your employees, but we still want to tip,” Patrick Yearout, Ivar’s director of recruiting and training, said at the 2016 Northwest Foodservice Show. “We put the tip line back on, saying ‘Tipping is not expected, but if you’d like to do so, here’s a line.’ ”

TRIAL AND ERROR

With minimum wage increases and other labor cost pressures, the restaurant model is in a period of significant change.

“We’ve already seen a lot of restaurants in Seattle react with service charges – and we are still a few years out from a mandated $15 minimum wage for most operators,” said Price. “I expect restaurants in other communities will also experiment with service charges, higher menu prices and so on. Ultimately I think increased costs, in the form of a higher minimum wage in this case, will be passed on to customers in some way, shape or form.”

In fact, at least one restaurant that experimented with a service charge has gone back to tipping.

Mollusk, a new restaurant in Seattle’s South Lake Union district, recently replaced its 20 percent service charge with tipping and a 10 percent increase in menu prices that goes to the back-of-house.

Mollusk’s service charges had been equally split between front- and back-of-house, bringing the latter up from $15 to $18 an hour. Servers, bartenders and hosts, however, found they were making considerably less than they had in their previous jobs where tips were part of their wages.

Mollusk owner Travis Kukull, who remains committed to ultimately eliminating tipping, puts the blame on South Lake Union’s growing pains due to construction and lack of foot traffic.

“I want it to work, and I think it’s a great idea and creates a better community atmosphere,” Kukull said of service charges in a Seattle Times interview. “But we’re just not in a position to make it work … until we’re slammed.”

The process of change, as Kukull discovered, can be confusing and often difficult. Careful planning and flexibility are essential, whatever you decide to do.

“When we switched to a $15-per-hour base wage for all workers, five of our 60 employees were making less than this amount when tips were considered into their hourly rate – we have always been a tip pooling and tip sharing house front-to-back,” said Price. “While our labor costs are higher now, our service charge has helped us to mitigate these increases substantially. I would encourage other restaurants to run the numbers and to speak with their accountant.”

Ultimately, it is also a good time for hospitality owners and operators to start paying closer attention to the political arena where decisions over employer mandates and higher labor costs are being made.

“Restaurant operators will confront government actions more often,” said Donegan. “It is very important to be involved in the process. You can’t complain about what government does if you are not involved in the process.”

(Source: Washington Restaurant & Lodging Magazine, May 2016)

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