Tonight's Headline Fight: Tipping vs Service Charges, a rematch

On July 24,2022, Minneapolis newspaper Star Tribune published an article about the local restaurants who have opted to implement Service Charges in their payment model. This article is a flashpoint, and some version of this same article has been published by the local media every 6 months or so over the past 4 years, and it gets both restaurant owners and customers talking about the differences between a tipping restaurant and a Service Charge restaurant again. 

Invariably, someone in the vocal group of commenters after the article puts forth some version of this question:  Why can't we just tip servers at restaurants?

I'm going to answer that question from two different perspectives - one, as the accountant I'm hired to be by Cue the Accountant, which is a Minneapolis accounting firm for many restaurants in the Twin Cities and beyond, and two, as the consumer who visits restaurants and has experienced both the tipping and non-tipping environments.

First, as an accountant in the restaurant industry for the past 20 years, I have amassed a bit of inside knowledge as to how tips work financially, both for the owners of restaurants and their employees.  I have processed payrolls for tipped employees and non-tipped employees, and I have first-hand knowledge through the restaurants for which I've had the privilege of working throughout my career, which is a list approaching 100.  There are over 1,000 restaurants in the Minneapolis area alone, so my experience may or may not be reflective of our market as a whole, and I might suggest keeping that grain of salt handy.

Second, a few definitions, which I think will help everyone understand the basis upon which I am going to opine:  
 - Tips are defined, by law, as belonging to whomever they are given:  "Tips are the property of the direct service employee (employees who directly receive tips, such as servers or hairstylists). Employers cannot require employees to share their tips with indirect service employees (employees who do not directly receive tips, such as bussers, dishwashers, cooks and hosts)."  So, the tips belong to the Servers and Bartenders, and cannot be required by an employer to be shared with any non-tipped staff.
  - Service Charges, on the other hand, belong to the restaurant.  They are considered a source of revenue for the restaurant, and are not tips, in that they do not belong to any employee.  There is no requirement to disclose how the Service Charges are utilized by the restaurant, either to customers, employees or the government.

The market factors in the Twin Cities that have led to the rise of Service Charges are:
 - An increased minimum wage schedule in both Minneapolis and St. Paul, and the increased minimum wage statewide in Minnesota 
  - The Earned Sick and Safe Time mandate in Minneapolis and St. Paul, which requires paid time off for hourly employees
  - PPP and RRF funding - these programs were intended to keep restaurants afloat financially, as government mandates required in-person business to close.  As employees return to work in-person, they are asking for higher wages, which have been offset by these funding programs (at least initially).  
  - COVID and low unemployment have contributed to a scarcity of employees who are able or willing to work.  Kitchens are experiencing the highest vacancies, which has driven up the hourly wage for these employees who are in high demand and low supply. 

As the wages rise for minimum wage employees - usually Servers and other tipped staff - so have the wages increased for Kitchen employees, and then subsequently for other un-tipped positions.  Think about it - if you know that the certain employees within your company are now making 15-33% more per hour than they did last year, wouldn't you also want a raise?  After all, your job is important, too!   This leaves restaurant owners with the question of raising revenue to pay for all of the wage increases.   

The lever that's typically used to raise revenue in restaurants is menus prices.  This may seems to be the logical approach - a restaurant's costs go up, so their prices also increase.  However, customers tend to zero in on the price of menu items, maybe more so than the price of the entire experience, which would include the addition of the tip.  For instance, if the menu price for a burger is $15, and at the end of the meal you decide to tip 20% (or $3), you've paid $18 for the burger, essentially.  But you are more likely to recall the $15 burger price when describing the price of the meal, not the $18 you paid at the end.  If a restaurant moves the menu price to $18 - which would include a 20% price increase - you're going to remember that you paid $18.  Restaurant owners believe this will result in lower sales, as customers decide the restaurant is too expensive, regardless that the two scenarios above resulted in the same amount paid by the customer.

Another lever to raise revenue is to eliminate tips, and instead implement Service Charges.  Adding Service Charges to a restaurant check more closely represents the experience that customers had within a tipping environment.  You would still pay $15 for the burger, and a service charge (20%, for instance) would be added to the bill, and you would pay $18.  The restaurant is allowed to use the additional $3 as they see fit - just the same as if the burger were $18 to begin with.  Typically, restaurants that have implemented a Service Charge pay their staff a higher wage 
 than was paid in the tipping environment.  Servers, Kitchen Staff and Managerial Staff are all paid a market rate, and usually tipping is no longer allowed at a restaurant with Service Charges.  

One of the potential downfalls to the market as a whole with the implementation of Service Charges or raised menu prices is that the employees who are working for higher wages create inflationary pressure on the going wage for all restaurants, regardless of the Service Charge revenue.  We are starting to see this happen at some of our client restaurants, and given the difficulty in hiring and retaining employees, restaurant owners have not been always been able to resist paying the higher wage.

Here's my take as a consumer: I am in favor of Service Charges.  I like not having to figure a tip, and I like not having to feel guilty about whether I'm leaving enough of a tip.  When there are Service Charges (or increased menu pricing, for that matter) added to the check, the cost is already decided for me, and I know that the wages throughout the restaurant are based on merit.  It's of interest to me that the whole team is compensated fairly, and in a tipping environment, only the employee in front of me would receive the tips I leave.  In my opinion, it is the employer's job to pay their employees, and my relationship with the restaurant should primarily involve my enjoyment of their atmosphere, their food, and the people I dine with.