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Industry Updates

Why Restaurants Are Ditching Tips

Written by
Will Harmon

The idea of the "tipless" restaurant has been slowly spreading over the last 5 or so years, but in recent years especially it has gained some notable steam. The movement earned a headquarters in California's Bay Area, with several popular free-tip restaurants located in San Francisco, Berkeley, and Oakland. There's a handful of reasons why a restaurant would choose to switch from a traditional model of staff compensation to a tipless one. Internally, restaurants are trying to close the gap between front and back of house wage gaps. Externally, there are a plethora of forces that are driving this change in convention. Let's just say there's a reason why this movement began incubation in the Bay Area.

In the employment metropolis that is the Bay Area, there exists a perfect storm of high minimum wage and high rent costs. This year, minimum wage rates across the Bay Arearange from $11 to $13, which is definitely on the far end of the spectrum when compared to the national minimum rate of $7.25. So why is the minimum wage so inflated in California? According to a recent study conducted by the Washington Post which measured the minimum wage required to afford a two-bedroom apartment in each state, California ranks 3rd behind Hawaii and D.C. at $30.92. However, if zoom in on California and apply this study to just San Francisco, the minimum wage to afford a two-bedroom apartment goes up to $58.04!

These are the kind of prices that restaurant employees are facing. Naturally, the likelihood that any single employee is looking to rent out a two-bedroom apartment is extremely low, but for most people finding your own place is still out of the question. As restaurant staff knows, you live and die by the tip. With most occupations, you can budget out your expenses because you know the exact number that will appear on your check. For restaurant staff, you can estimate how much you make on average, but that number is weighted almost entirely on the generosity of your patrons. For that reason, increased minimum wage rates are providing restaurant owners and managers with an opportunity to provide their staff with a consistent income that helps them afford the cost of living.

However, restaurant budgets remain the same, so if more money is going to their staff then there needs to be compensation elsewhere. Enter the menu.

How Restaurants are Making it Work

In order to adjust for the increase of cash flow to employees, restaurant owners are upping price points on the menu. This change is being heralded as progressive, civilized, and "the way of the future." What you see is what you pay. At Camino, a restaurant located in Oakland, California, the menu states “No more tips. Our prices now include service so we can pay all our employees a living wage.” Restaurateurs are absorbing their labor costs into their menus in order to promote a more sustainable lifestyle for their staff. At the end of the day, if your employees can't even afford to work for you, you'll have colossal turnover rates and a staff that's being spread way too thin.

Restaurants are experimenting with a few different methods for cutting tips. Aside from menu pricing, restaurants are testing out implementing surcharges to each meal based on per-person and per-meal criteria. If one thing is consistent it's that restaurants have not yet found the secret sauce to making the tipless model work. High-end establishments that are able to get away with high price points and surcharges are finding more success with the model while more casual restaurants are throwing in the towel and reverting back to tips, citing that "it was just too difficult to succeed on that scale."

The Challenges

No matter how you present this idea to your customers, there's bound to be some friction. We've been tipping in restaurants for centuries, so it's not a behavior that can be so easily adjusted. When a customer looks down and sees abnormally high price points, they get a little skeptical. Even when customers learn about the no tip policy, they still feel compelled to acknowledge the service with a tip. For this reason many restaurants who took up arms in favor of the tipless movement back in late 2015 are reverting back to accepting tips because it just wasn't sustainable.

The restaurants that are putting skin in the tipless game are pioneering the way for successful methods for eliminating tips in the future, and ultimately, eliminating the disparity between front and back of house pay. This means fair wages for a restaurant's entire staff in edition to benefits, like healthcare. While there is no tried and true method to making the tipless model work, each attempt is helping the industry move toward a sustainable future ripe with fair wages and job security. Joe's Crab Shack, a major national restaurant chain, starting testing a tip-free model in 2015, but called it quits in early 2016. The restaurant chain learned that customers just like to reward good service, so higher price points on the menu just left a bad taste in their mouth. If anything is certain it's that the restaurant industry is paying attention to this experiment with bated breath. With minimum wage rates in the Bay Area expecting to spike up to $15 by January 2019, more developments on the tipless model are soon to come.

About the author: Will Harmon is a Marketing Associate at BlueCart, an online and mobile wholesale procurement platform for buyers and sellers in the hospitality industry. When he's not writing about the latest food trends, he's probably out searching for his next favorite breakfast spot or attempting to go for a run.

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