The Leader’s View: Future of Tipping Debate

March 2019

This week EP brought together two senior players to debate the topical subject of tipping within the hospitality industry.

In collaboration with WMT Chartered Accountants, EP has been running a campaign on the ‘Future of Tipping’ which aims to find clarity on the views of the industry. In an initiative driven by WMT, the suggestion of an accreditation scheme and kite mark have been put forward with the simple aim of providing clarity for the industry and its customers.

Joining us at the debate were:

Michael Gottlieb – Advisor, Consultant and Renowned Restauranteur
Marianna Alfa – Restauranteur and Consultant with experience in US, UK and Europe. Most recently VP of F&B of YOTAL Hotel Group
Peter Davies – Client Service Partner and Managing Director of WMT Troncmaster Services

Peter started the discussion by setting the scene as to why now is the time for this debate. He highlighted the Prime Minister’s intention to legislate on tipping in a statement made in October 2018. He also noted how the wording used by the PM, “100% of tips should go to workers”, was vague, could be interpreted in different ways and has led to some confusion in the industry.

To clear the confusion and reach clarity the industry must work together to ensure it finds the right path forward. The idea of an accreditation scheme has been suggested and whilst the mechanics need to be worked through, it could be a lot safer and more effective than legislation.

Tips vs. Service Charge and Who Gets What

Peter explained the current confusion surrounding tips vs. service charges and the resulting confusion over who gets what money – if an operator should take a percentage to cover card charges for example.

Michael suggested an example of what the industry might do if restaurants were to give 100% of the service charge to the staff whilst paying them minimum wage. “If service charge service charge were to be dropped, to say 7%, would make things easier to understand?

Peter explained that some operators are considering this and looking at then raising prices in order to pay their staff more to cover the deficit. This is not however a well-regarded as a solution in the UK.

Marianna added that in the US for example they have removed managers from the tip distribution pool (80/20 rule) but this in turn decreased the profit margins as the house had to pay full salaries fully from the payroll budget. “Suddenly managers in a restaurant were on the same salary as front of the house service staff who made the extra earnings from tips. The incentive for skilled service staff to move up into managerial positions was minimal as earnings of service staff with tips added up and was higher than management salary the house was able to offer. By removing managers from receiving tips some operators went from a 20-25% profit margin to 17% and it still remained rather difficult to provide competitive salaries for management.”

UK vs. US

The question over US tipping practices vs. UK was raised as a result of Michael and Marianna’s international experience. Peter explained that in the UK there is no more ‘fat to cut’ if operators were to remove the option of service charges or tips:

“We have a shrinking labour market and its particularly difficult in London. If service charge or tips were to be removed, would the business bear the cost? Probably not and they probably can’t, so the consumer will have to. However, they have a vast choice and can choose between the restaurant with no service charge and higher menu prices or the restaurant with service charge and cheaper menu prices, most will choose the perceived less expensive option”

Marianna shared how prolific New York City restauranteur, Danny Meyer, stopped all tips in his businesses as an example of an American chain trying something new. She commented however that this was trialled at a time when his restaurants were very popular and at the peak of success.

Although it appeared successful at the time, there are questions marks over how well his staff have adapted. Peter added that having loyal customers who know they will have a good experience can make a difference here.

Home-Delivery

All three in the debate agreed that the vast choice of delivery is playing a role in the decline of restaurant goers, which in turn is impacting tips and service charge. “With this taking place any further cuts, like legislated tips, would be very damaging. It could mean people go out less often or spend less and both may have damaging impacts” said Peter.

Defining ‘Worker’ Roles

Marianna explained how the stronger multi-site brands can survive change because one location can support another if it goes through a tougher time, smaller independent operators don’t have this option. Peter added that this creates a difficult situation where the owners of the business might help on the floor or in the kitchen during tough times, but under proposed legal change might then suffer because their position doesn’t justify any support from tips.

Is the Customer Bothered?

Michael shared how that the vast majority of customers don’t want to be bothered with thinking of where the service goes and most assume it goes to the staff in one form or another. “A very small majority who do care generally ask the server. For service charge in business today it works, you keep around 3% to cover card payments and then the rest is divided.”

Peter argued that some people are interested and do want to know the detail on where their money goes – “This is why the kite mark is an interesting solution. If the consumer can check and see a business is following best practice and if the employee is trained to explain the set-up, it can make for a better experience. It is a possible middle ground?”

Michael took note of this and suggested that some may become worried if the government did become involved. He was concerned that customers may not appreciate the gravity of the proposed changes and therefore get it wrong.

Absorb the Service Charge?

Peter went through the detail on why removing a 12.5% service charge and absorbing it into the menu price would dramatically impact the industry. “The staff need to take home the same money as they had before, or they will move elsewhere. But when one considers pensions, taxation and other statutory costs, it actually becomes more like 25% extra on the menu prices just to stand still… which business aren’t going to absorb.”

Recent surveys conducted by EP and WMT showed that 50% of customers would not be willing to pay higher prices if service charge was abolished, so this is also not a viable solution either.

Time for Change?

Michael reasoned that any change must be actioned by a majority, Peter concurred adding that; “the important part is reassuring consumers so they feel confident when they tip or pay a service charge. Coming together as a collective and arguing for a clear accreditation scheme which showcases best practice could make the difference. This way the consumer is clear that whatever they give, they know where it goes and how it’s used.”

All agreed that any change should also be more effective for the employee too. “Unfortunately, you do get a couple of bad eggs who will ask for cash tips rather than card. But for the majority if they know exactly what their business does and its best practice, it should resolve any difficult current situations.”

Marianna added that it may also support retention of good staff by showcasing that the business is addressing a topical subject.