Tipping is Going Extinct

Over the past week weeks, a storm of debate has surged over the news that Danny Meyer has opted to eliminate tipping in his fine dining restaurants over the course of the next year. It’s a monumental decision and the change has its advocates and skeptics. In this month’s Enterprise Insight, we’re cutting through the opinion to talk specifically about the benefits and challenges of implementing such a system.

Specifically, we will review what operators need to consider when thinking about this: why, how, and the possible pitfalls.

Why Would You Eliminate Tipping

With our clients, we’ve discussed three key reasons for implementing a more-European system: pay disparity, retention, and rising wages.

The back of house has always been under-compensated in comparison to the dining room. Due to the legal classifications of wages, back of house employees cannot be tipped. Under a tip-included system, the real cost of the meal—menu price plus tip—is built into a single number, and the revenue from that number is accessible to the owner to distribute as he or she sees fit.

This, in turn, can help with retention. Low-wage jobs are historically high-turnover jobs. However, with access to the tip ‘revenue,’ an owner can increase wages accordingly to alleviate this issue.

Lastly, rising wages are driving up labor costs and in some instances, driving away skilled labor. With the minimum wage in New York changing on a industry-by-industry basis, it will only become more difficult to find and retain great team members. Again, a tip-included system allows the operator to offer competitive wage rates.

Additionally, in the front of house, the tipped-minimum is also going up. Come January 1, NYC restaurateurs will be required to pay their servers $7.50 per hour–a 50% increase. However, if the restaurant eliminates tipping, then the team can be paid a salary, or a greater hourly wage plus a bonus drawn from the ‘tipped revenue’, thus alleviating this jump in labor costs.

How Would You Eliminate Tipping

Currently, there are only two viable options: increase prices, or apply an “administrative fee.” Be mindful with an applied “fee:” if you charge a “Service Fee” rather than “administrative,” you cannot disburse that revenue to any one not in a service position.

Neither feels good right now, but we believe that price increases will become the new normal. Here’s why: with an “administrative fee,” tipping isn’t eliminated, it’s removed from the diner’s control. With price increases, it’s truly taken off the table. The diner does not know and cannot argue with the prices because they give no allusion to the portion going to the team.

Pitfalls

Increasing pricing will always cause a certain degree of pushback from guests. Until they’re fully on board with tip-included system, the sticker shock will cause a reaction. However, as more and more of NYC s fine-dining enterprises move to this style, the less resistance operators will face. Whether your establishment plans on keeping or eliminating tipping, it’s important to understand the mechanics, because “tip-included” is bound to become the new normal for a significant portion of the dining scene.