The End of Tipping?

Why This Practice Should Cease

The End of Tipping?
February 20, 2015

The minimum wage is finally starting to move upward in America . However, some jobs are exempt – especially those like servers and hotel staff where tips make up a significant part of the income. Why do we keep a portion of American workers in a situation where their wages are unpredictable, low, and capable of being well below minimum wage?

Some expected level of tips is figured into these workers’ incomes to allow justification for the lower baseline wages. One could make the argument that by not tipping, patrons are effectively stealing a portion of the workers’ wages. Wouldn’t it make more sense to eliminate tips and raise the wage level?

An upscale restaurant in Pittsburgh reportedly agreed with that assessment. In April, Bar Marco intends to ban tips, while raising the salary of its full-time employees to $35,000, along with stock shares and health care benefits. More impressively, Bar Marco management does not intend to raise prices.

Health care coverage was reportedly the final straw in Bar Marco’s decision to switch over to a standard employment contract.

It will be a tough sell for other businesses to follow suit – but here are some good reasons why they should, from both the servers’ and customers’ points of view.

  • Disconnect between Tip Amounts and Service – If tipping truly was related to better service, the model might make sense. However, this is not usually the case. Some people have a standard tip they give regardless of the quality of service; others use a poor tip or no tip as punishment but do not give proportionately larger tips for excellent service.

    According to Michael Lynn from the Cornell School of Hotel Administration, the perceived difference in the level of service only covers 2% of the discrepancies between tips. That is unlikely to be either motivating or demotivating, especially when compared to a higher and more predictable wage with no tips.

    Further, a poor dining or hotel experience may not be the fault of the front-line service that receives the tip. For example, a poorly cooked steak is not the fault of the server who delivers it to the dissatisfied customer.

  • Unfair Percentage Basis – Tips based on flat percentages make little sense. The effort that goes into serving a table of four at a Waffle House is probably not much different from that of an expensive French restaurant, but because of the large difference in the size of the bill, the Waffle House server receives far less money.

    Granted, if tips are ended and wages are raised, the Waffle House worker will still make less than the French restaurant worker, but at least the amounts will be known and relatively stable.

  • Lost Taxes – Workers are obligated to report tips monthly, assuming they receive more than $20 in tips during that month, and employers are obligated to collect income tax and FICA taxes. However, cash tips often go unreported and, therefore, untaxed.

    How much could unreported income possibly contribute to the tax shortfall? In 1998, the IRS estimated the uncollected taxes on unreported tips as being in the $9-$12 billion range. That is not the unreported tip income – that is the amount of taxes on that income.

Restaurants and industries with low profit margins are likely to balk, assuming prices must rise to cover the extra expense – and it is possible that some truly cannot stay in business with higher prices. However, it stands to reason that a business that can eliminate tipping and balance compensation with suitable prices can thrive. We think the time has come for this idea to be put into practice.

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