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APU Business Original

Will the Planned Higher Wage Bill Mean the End of Tipping?

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COVID-19 restrictions have created an opportunity for hospitality businesses to reexamine their policies and processes. They need to refine what they do best and correct deficiencies more effectively than by relying on spur-of-the-moment fixes that might resolve a problem, but without proper consideration or deliberation for their aftereffects.

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One specific policy being reexamined while wages and employment are also scrutinized is whether gratuities should remain an integral part of many hospitality transactions after the pandemic is over. Or, how can we find a better solution to tipping for both employees and employers?

My first jobs in college were waiting tables at a buffet-style steakhouse and at a Cracker Barrel restaurant. I quickly learned to hustle and provide exceptional service or make tough decisions financially. Similar decisions are being made every day by tipped workers who could theoretically earn quite a bit from tips, but are otherwise limited by where they work, the expectations of the clientele, or other variables beyond their control.

Historically, Gratuities Have Been a Persistent Point of Contention

As described by Tripsavvy, tipping was introduced in the United States by self-proclaimed American “aristocracy” emulating customs of the European aristocracy. Newly minted Americans borrowed the custom to show how “refined” and classy they were.

Once the practice took hold, questions arose as to its suitability and benefit, giving root to many of the arguments made today. Chief among them was that tipping perpetuated a system of inequity or inequality.

Tipping as compensation for recently freed slaves and minority workers accelerated the growth of the practice and its acceptance. Rather than pay Black workers a fair wage, employers utilized a gratuity system for them to be compensated by patrons based on their perception of the work.

Objectively, this would be an easy premise to justify as the workers’ earnings were based on their performance. However, the simple truth remains it was an excuse to not pay freed slaves for their labor.

Patrons also took advantage of such workers and might offer a nominal tip, if any. As a result, workers would toil for next to nothing while employers justified the tactic.

What Tipping Can Do to Tipped Workers

In his research examining the effects of tipping on consumer satisfaction, tipping expert Dr. Michael Lynn outlined several assumptions about tipping that have persisted and grown in scope after the Civil War. Tipping, Dr. Lynn found:

  • Discriminates against less attractive waitresses and people of color who receive lower tips than do more attractive waitresses and white servers
  • Results in unreliable and low incomes for tipped workers
  • Creates income inequality between tipped and non-tipped workers [i.e. waiters and cooks]
  • Enables and encourages customers to sexually harass females working for tips
  • Enables and encourages income tax evasion among servers
  • Undermines the consumer’s dining experience

Tipping Has Harmful Effects, but Tips Also Enhance the Customer Experience

Dr. Lynn acknowledged the harmful effects of tipping, but his research showed tipping enhances the customer experience. Tipping was perceived favorably by a majority of consumers and post-service reviews of companies were more negative when tipping was not permitted. Banning tipping would lead to increased negative perceptions of service quality as well as higher restaurant checks if service gratuities were included in the tab, as is often done for parties of six or more.

Though the Senate parliamentarian ruled the minimum wage increase could not be included in the recently passed $1.9 trillion COVID-19 Relief Bill, President Biden’s minimum-wage proposal still aims to increase the federal minimum wage to $15 an hour. If that proposal is also eventually passed into law, the bill would end the subminimum wage, which can be as low as $2.13 an hour.

When the subminimum wage was established in 1966 with amendments to the Fair Labor Standards Act, it was set at 50% of the minimum wage at the time. It has since been diminished to just under 30% in areas with a $7.25 minimum wage. Though the federal minimum wage has increased slightly over time, it still lags behind inflation and cost of living increases, and the subminimum wage has remained stagnant.

A difficult benefit some employers will have to work around will be the use of gratuities to supplement a subminimum wage. This strategy enabled employers to reduce their overall labor expenses. As reported by The Wall Street Journal, businesses using a subminimum wage in 32 states could see increases in direct labor costs of $10 to $13 per hour. Several other states would see increases of $5 to $10 an hour.

Though these minimum-wage changes will be significant, they will be implemented gradually, allowing businesses to ease into higher minimums over the next five years. During those years, more businesses will have to find ways to provide the same level of service while also having to pay their workers increasingly more money.

Not only will they be paying their tipped employees more, but they will have to increase the pay of their regular salaried employees whose wages may be correlated to the minimum wage. Meaning, supervisors currently earning $13.50 an hour will also be paid more based on their role and responsibilities. They will not want the stigma of earning the minimum wage.

The argument is that increasing the minimum wage is unsustainable without also 1) raising the price of the products or services, 2) cutting back on hours worked, or 3) letting some workers go. Workers most capable to perform under a heavier workload will benefit from the increased pay, while others will be terminated. The marginal gains in wages will be negated by higher costs, creating a new normal but not creating worthwhile change.

Using Gratuities to Supplement the Minimum Wage Would Mean Waitstaffs Would Have Nearly Unlimited Earnings Potential

In theory, using gratuities to supplement the minimum wage would mean that waitstaffs would have nearly unlimited earnings potential. However, the reality is there are a lot more variables at play that render that potential virtually nonexistent.

The Economic Policy Institute (EPI) showed how working for tips was not beneficial for many workers in 2014. Over time, there have been numerous incidents of fraud or theft as workers do not always report accurate amounts received; also, managers skim off the top or share tips with untipped workers who earn more money in any case. Additionally, the EPI found that the median tipped worker earned less than the median U.S. salaried worker.

Naturally, there are high performers earning more, but they are not the majority of tipped workers. They fall near the poverty line, scraping to get by with an inconsistent income. This larger group also contends with inconsistent work schedules, increasing the likelihood they are not receiving additional benefits associated with being full-time employees.

Should Tipping Remain a Common Practice?

So with the expected increase in the hourly wage, should tipping remain a common practice? This is a tough question to answer because a wide variety of people earning gratuities have experienced different results. Naturally, the tipped worker barely making it in Smalltown, USA, is going to have a different opinion than a career server at expensive restaurants in Las Vegas or New York who earn more than entry-level teachers, law enforcement officers, or even their supervisors.

The high-tipped earners, however, are not representative of the actual results many others are experiencing. Tipped workers can make a living or create a foundation for moving on to something else. But median tipped workers could also create the same foundation if they were to earn a minimum wage commensurate with their peers earning an hourly wage.

Without gratuities to supplement a subminimum wage, market forces will become more of a factor as skilled workers will gravitate toward employers compensating more for their skills.

Tipping does not have to be eliminated, but more options, such as pooling tips, would attract quality workers. Pooling might build cooperative, high-performing teams.

For employers, the expected higher minimum wage would mean greater earnings potential for their employees. The next step then in tipping would be tips given voluntarily or without obligation rather than as a replacement for a livable hourly wage.

Steven Cooke is a certified hospitality educator and assistant professor in the Dr. Wallace E Boston School of Business and Hospitality Management program. He develops and teaches classes related to operations management, hospitality law and management theory. Prior to teaching, Steven served in the United States Army and then worked in operations management within several well-known restaurant brands in North Carolina and Las Vegas.

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