ugsrp University of Guelph Sustainable Restaurant Project The Tipping Point: Is There a Fair Share?

Transcription

1 The Tipping Point: Is There a Fair Share? Mike von Massow and Bruce McAdams Discussion Paper 16/05/2012 ugsrp University of Guelph Sustainable Restaurant Project

2 The University of Guelph Sustainable Restaurant Project The University of Guelph Sustainable Restaurant Project (UGSRP) was started by a team of faculty and students from the School of Hospitality and Tourism Management in the spring of Originally created to help increase the amount of green curriculum at our school, the goals and objectives of the project have evolved to include a wider range of issues facing the Canadian restaurant industry. Fundamentally, UGSRP s mission is to envision the restaurant of the future and to communicate that vision to our students and the industry. Our mission is built on three pillars: to learn, to teach, to share. As we continue to discuss and research how environmental sustainability relates to the restaurant business, we are also committed to studying both the economic and social aspects of sustainability. This will be accomplished by generating research about topics of concern to restaurant operators while also acting as a hub of information and educational source for industry stakeholders. This discussion paper addresses an issue that was once referred to by an icon of the Canadian restaurant industry as the curse of the business. As we continue to research and prepare an academic paper on the issue of how gratuities effect restaurant operations we felt it appropriate, given the current media coverage of the topic, to put forth some of our thoughts and preliminary findings on the subject. Please refer to our blog ( )for research updates on this and other issues.

3 Introduction There has been considerable discussion around the ownership of gratuities left in restaurants. Recently, two high profile media stories reported servers complaining about having to pay the house a share of their tips. There is also a Private Member s Bill in Ontario that would forbid restaurants from taking any share of tips from servers. The challenges that gratuities pose for managers and the policies that deal with these challenges is a subject of ongoing research at the University of Guelph Sustainable Restaurant Project (UGSRP). It is important that this particular issue not be oversimplified and be considered in a broader context before judgment is passed. Tipping is an interesting phenomenon. The Merriam Webster dictionary defines a tip (or gratuity) as something given voluntarily or beyond obligation usually for some service 1. Tipping is generally regarded as a social norm in North America, particularly with respect to restaurants. It is, however, not a universal norm and many countries and cultures have no tipping conventions at all. Tips represent a significant sum of money and can often represent the majority of a restaurant workers total compensation. It is estimated that the value of tips in the United States exceeds forty billion dollars annually (Azar, 2009). If we use a rule of thumb that the Canadian Hospitality/Restaurant Industry is approximately one tenth the size of the U.S., we would estimate that tips in restaurants and bars represent in excess of four billion dollars annually in Canada. It is worth noting that despite the voluntary element of tipping, research strongly suggests there is little connection between service quality and the size of the tip (Lynn and McCall, 2000). Overall, it appears that people feel obliged to tip and, while they do have a range over which they tip, the range is relatively small. In fact, Koku (2005) finds this is particularly true in restaurants. While a tip in a nonrestaurant service encounter may reflect a genuine evaluation of satisfaction with the service provided, tips do not seem to vary by service quality in restaurants and are largely given because of the social norm and the consumer s aversion to appearing cheap and not following the norm (Parrett, 2006). It is important to note there is evidence that better service can increase tip size (Lynn and McCall, 2009) but the increment is marginal. To a large degree, tips are a predictable revenue stream associated with restaurant operations. We would argue that there are circumstances where tip outs 2 are not bad and can actually contribute positively to the smooth operations of a restaurant and improve equity or fairness for staff. The majority of restaurants have some form of mandatory tip sharing or pooling with other staff members. The amount that is shared and the staff who it is shared with varies by restaurant and has generated significant interest in both the industry and the media, which will be discussed later in this paper. This discussion document is intended to provide an overview of the evolution of the practice of tipping and foster a discussion of the broader context of that it occurs. This is a complex issue without simple answers or solutions and regulators, managers and others should not rush to judgement. 1 webster.com 2 Tip out refers to the requirement that a server who earns tips turn a specified portion of tips (or sales) to a central pool from which other staff are paid a share.

4 The Evolution of Tip Sharing Tip sharing has evolved. It has become entrenched as part of the compensatory system of restaurants in Canada. Although some forms of tip sharing have been around for decades, only recently have we seen the majority of restaurants move towards collecting standardized tip outs that are then pooled and redistributed amongst various support positions. Tip out refers to a practice in which servers are required to give a percentage of their sales to a pool that is split amongst other staff. Thirty years ago, an average tip left by a restaurant patron likely ranged between 10 and 15 percent with the server taking home the entire, or majority of the money. Servers were often only obliged to tip out a small percentage of sales to the bartending staff allowing them to retain the rest. In some establishments, servers realized that if they themselves tipped out support staff at the end of the night they may benefit from increased attention from busboys, or even be rewarded with better tables from their hostess. This informal process often caused significant tension and inequity amongst staff. In today s restaurant, many aspects of tipping have changed from both a consumer and operator point of view. The average tip percentage left by restaurant patrons has increased to between 15 and 20 percent. Restaurant operators no longer promote (and actively discourage) the practice of servers tipping support staff but instead have created a new system to redistribute tip revenue which allows for more control over the process. Collecting a set percentage of sales from servers to distribute to support staff, like busboys and hostesses, was the first step in what has now become the common practice of collecting set tip outs from servers and sharing, or pooling the proceeds to other staff positions based on hours worked. Tip out percentages can range from between 1.5 to 6.0 percent of the server s sales, depending on the type of establishment and the number of support staff that are involved in the sharing. When originally adopted, the majority of restaurants shared this money with front of house staff such as busboys, hostesses and bartenders. In recent times, many operators have chosen to expand the distribution to include back of house employees such as cooks and dishwashers. It is also known that some establishments go further than this and share this money with management positions to help subsidize their salaries. It is worth noting that there are also situations where restaurants take a portion of the money for other uses such as, to cover the cost of dine and dash or breakage, to recoup the cost of credit card fees or simply take a house share. While we find this happens relatively rarely, it does happen. On the surface this seems unfair and in most current applications we would agree. However we would also argue that there may be a situation where it might be fair for an owner to take a share. Consider, for example, if an owner, in an effort to create a team service commitment, raised everyone s wages (which would reduce income risk) and then took a portion of the tips to cover the increase in wages and predictability. This would allow the team to split gratuities to reflect the value of the total service experience generated by all of the better rewarded staff.

5 It is also worth noting, while servers like to keep their tips, there is evidence that servers acknowledge that it might be fair to share gratuities with other staff who add value to the service experience (Lin and Namasivayam, 2011). Lin and Namasivayam (2011) found more than two thirds of servers said it might be fair to share tips with both front and back of house staff but not with supervisors or managers. It is understandable in this time of decreasing margins that operators look more and more to this tip revenue to help supplement their payroll systems. It is well documented that in recent years restaurants have had to deal with unusually high increases in both food and utility costs. On top of this, some provinces have imposed dramatic increases in minimum wage rates. For example, from 2004 to 2011, both the standard and liquor server minimum wage in the Province of Ontario increased an incredible 50%. The province of Quebec has a lower minimum wage for workers who receive gratuities but, with the exception of unlicensed restaurants, this is achieved in Ontario through the lower wage to workers in licensed establishments. Our investigations suggest that in the vast majority of cases, for servers receiving gratuities, the actual hourly wage is less than 50% of the total hourly compensation and can be as little as 25 to 30%. It is relatively clear that increases in wage costs for all workers (along with other factors that have constrained margins in food service) have constrained growth in the wages for non tipped workers. We noted earlier that average gratuities are also increasing in which servers have experienced the most significant growth in remuneration in restaurants, often making two to three times more than staff in the kitchen. Tip outs are an attempt to close this gap somewhat. It is also worth noting that other jurisdictions have recognized this gap to a degree. The State of New York has provisions on the minimum wage regulations to pay a lower minimum wage to servers who receive tips provided they still make the minimum wage. The New York regulations also allow for tip pooling with selected front of house staff such as bussers or hostesses but not back of house (kitchen) staff. Who Creates Value? One of the motivations behind tip sharing is to reflect the value created through the service experience. The question is how should the value in the entire service experience be divided? It is also valid to ask what value the consumer is paying for in the price of the menu items ordered. What creates value in a restaurant service experience? This clearly differs in each circumstance and likely also differs by individual customer. Quality of service is important. The quality of food, the atmosphere and the length of time in the restaurant are also potential components of perceived value. Conceptually at least, the emergence of tipping was to reward the individual server for a job well done. The rest of the perceived value of the service experience was reflected in the price charged for the meal. If we accept this premise we still need to address two potential issues with respect to tips. The first is an overlap between the server and the rest of the restaurant with respect to some elements of value. The server can influence how quickly (or slowly) food arrives but the staff in the kitchen and the number of staff in the kitchen can also play a role in this. If a customer makes a special request relative to the

6 food order, the back of house plays an important role in creating that value. The second point relates to the evolution of the service experience in restaurants. The Canadian restaurant industry has changed substantially in the past thirty years. The quality of the food and the variety available has improved at all levels of dining. There has also been an evolution in the role of service in some restaurants. Some restaurants still have the server do all aspects of front of house service but others have bussers who clear tables, food runners who bring orders out and hosts/hostesses who seat guests. These are all part of the service experience and service value. Should this value be reflected in the tip or is the tip only a reflection of the quality of the primary point of interaction? This merits serious consideration. This incremental value is not limited to the front of house. Open kitchens and other factors are changing the nature of the service interaction with diners and the creation of value for those diners. Not all restaurants are created equally. One of the authors recently dined at a stir fry style restaurant. Diners selected their own ingredients from a buffet and gave them to the cooks who interacted with customers as they cooked. These cooks were paid minimum wage and received a small tip out which amounted to approximately an extra dollar per hour while the server received about twenty dollars from this table alone (less than one quarter of which was shared with other staff). The servers did little more than bus tables and bring desert but were paid the liquor server minimum wage and also received the bulk of the gratuity. In this specific instance, the cooks did an outstanding job but the server did not do a good job of busing tables. Because they didn t deliver food or take food orders they were able to cover more tables so these servers actually made more money than most servers in similarly priced restaurants. There are as many examples as there are restaurants but the scenario given highlights the problem with recognizing the value created for a diner through the service experience. Equity, Fairness and Keeping the Peace There can be little argument that tip sharing is practised to compensate for an inadequate and inequitable compensatory model that has evolved in the Canadian restaurant industry. Although this practice is somewhat effective in redistributing monies based on value added by staff, its presence does create many intangible issues that can harm the restaurant from an organizational point of view. By collecting, managing and pooling tips, restaurants have in fact created a second system of remuneration in their operations. The burden on management by the creation of this second system is both obvious and not. The time and energy required to manage this secondary system can be substantial. From a manpower point of view, restaurants are in fact managing two sets of payroll books and all the headaches that come with it. From a taxation point of view, operators must also consider the possible ramifications that are involved once they have possession of any tips. While tip out is usually managed at an arm s length by a member of the staff, the vast majority of restaurant bills are paid by credit or debit card so restaurants are changing that to cash for the tipping pool. While trying to create a more equitable compensatory system, tip sharing can also result in the questioning of trust and transparency in the restaurant. Our preliminary research has shown a relatively high percentage of both restaurant staff and management think that tip sharing can, and does, create

7 issues of trust within the work environment. The benefit of a high trust organization is well documented and in an industry that is both labour intensive and relationship focused the importance of trust should not be underestimated. Tips may also promote individualistic behavior that can hinder a team approach and may create negative behaviors in staff. Our early findings show that it is not uncommon for staff and management to hold very strong opinions on fellow staff members based on their behavior in regards to tips. Those of us who have worked in restaurants are very familiar with the term table hog for instance. And how many times has a server come up to you after an excessive wait time on your meal to tell you he or she was sorry but they forgot to ring in your order, more than likely, the kitchen is backed up tonight will be the response. We may even tip the server more because we feel sorry for them that the kitchen ruined their evening! Our early findings have also shown that management will use the assigning of sections and tables as both a reward and punishment. In one instance an operator discussed with us the power that the manager has over the entire serving staff when it comes to creating the schedule. It seems that in all restaurants there exists better tip sections and better tip nights and the fact that management uses the distribution of these as a motivator must at least be questioned as to the long term outcomes of this practice. Operational Challenges Early results from our research indicate that potentially negative operational issues are often created by the presence of a gratuity based compensatory system. There is research which supports the notion that servers pre judge people as to how good a tipper they think they will be (Brewster and Mallinson, 2009). A recent interview we conducted with the General Manager of a casual dining restaurant stated that all people entering her restaurant do not receive the same service. She went on to state that a group of business people in suits are more than likely going to receive better service in her establishment than a young family. In today s hyper competitive marketplace should we not question a system that determines the level of service a customer receives based on the potential financial interests of a front line worker? We have also heard of servers (named quota servers ) who have a specific gratuity target in their mind and when they achieve it the quality of service declines. While many servers are committed to quality customer service, the current system does provide challenges to managing service quality. Another recurring issue we keep hearing of in our research is the restaurant industry s inability to attract and retain quality people in management roles. Tipping may also play a role in this situation. Many of the operators we ve interviewed state that they have trouble promoting internal candidates from server ranks to management because the reality is that these people will need to both take a cut in pay and work longer hours. The question again should be asked if this is a sustainable business model moving forward.

8 Conclusion While we continue to conduct our research into how gratuities effect the operation of a restaurant we felt motivated to create this discussion paper to put forth some of our early findings and interpretations on the topic. There has been considerable discussion in the media of the issues around tips and tip pooling and there is discussion of prohibiting any tip outs through a Private Member s Bill proposed in the Ontario legislature. It is not a ground breaking revelation to state that tipping has an effect on a restaurant s operation but perhaps this paper has shown just how deeply rooted it is within our restaurant systems. It is also fair to posit that the distribution and sharing of tips is becoming an issue that is seeing more mainstream media coverage. Given the potential for liability issues given this current system we recommend that operators take the time to review their position and policies on tip sharing. In our opinion, tip sharing is an attempt to make the best out of a bad situation. While there is potential for abuse, arbitrarily banning the practice would likely increase inequity in wages in the industry and take money from those that earn the least. It is worth noting again that the minimum wage structure may in fact constrain the wages of the non tipped employees. This is a complex issue within a complex and heterogeneous industry. A one size fits all fix will not be effective. Discussions need to continue on the best approaches to adding value and distributing recognition of that value, for the short and long term. We hope that this paper adds value to the discussion of the issue as we continue to ask ourselves if our current business models are the most sustainable in such changing times. If nothing else we hope this paper has shown the complexity of managing tips and their effect on operations and staff and has created the impetus for further discussion on the topic. Azar O. (2009) Incentives and service quality in the restaurant industry: the tipping service puzzle. Applied Economics 41:1917. Brewster Z.W., Mallinson C. (2009) Racial differences in restaurant tipping: A labour process perspective. Service Industries Journal 29: Koku P.S. (2005) Is there a difference in tipping in restaurant versus non restaurant service encounters, and do ethnicity and gender matter? The Journal of Services Marketing 19:445. Lin I.Y., Namasivayam K. (2011) Understanding restaurant tipping systems: a human resources perspective. International Journal of Contemporary Hospitality Management 23: Lynn M., McCall M. (2000) Gratitude and gratuity: A meta analysis of research on the service tipping relationship. Journal of Socio Economics 29:203. Lynn M., McCall M. (2009) Techniques for Increasing Servers' Tips: How Generalizable Are They? Cornell Hospitality Quarterly 50:198. Parrett M. (2006) An Analysis of the Determinants of Tipping Behavior: A Laboratory Experiment and Evidence from Restaurant Tipping. Southern Economic Journal 73:489.