Are the scales tipping towards no tipping?

There is a trend slowly picking up steam in the restaurant industry – and it has nothing to do with bacon, kale or cronuts.

Across the country, from New York City to California, restaurants are adopting no-tip policies. While some restaurant owners are making the change to eliminate competition between staff and reduce the chance of discrimination against servers, others have noted that not having to leave a tip makes for a less stressful, better overall customer experience.

It isn’t a new concept – several states actually passed short-lived anti-tipping laws in the early 1900s – but it is one that goes against the status quo in the United States, where a tip of 15-20 percent of the bill is less a norm and more an expectation. With a no-tip policy, servers are instead paid higher base wages and, in some cases, provided additional benefits like health care coverage, profit sharing or a sales commission.

How then are restaurants compensating for this change in compensation?
  • Inclusive service charges – Different from a tip, a service charge is an additional percentage automatically included in every customer’s bill. Service charges added to a bill are considered part of an employee’s wage and are therefore subject to withholding and reporting requirements. Click here to learn more about IRS rules regarding the difference between service charges and tips.
  • Increased menu prices – Whatever the percentage, some restaurants increase the prices on their menu to allow higher wages for staff.
  • No immediate action – With future business stability in mind, some restaurants are hoping that providing stable wages at a higher rate will reduce staff turnover and attract higher-quality servers who provide better customer service.
Can you ever see your restaurant adopting a no-tip policy? Have questions about how it would change the accounting for your business? Contact a BDO restaurant professional today.