As restaurants across the country contend with hikes in the minimum wage, eliminating tips is now on the menu. Replacing gratuities are higher prices or European-style service charges to help cover the higher labor costs.
"This has been a much debated topic, and much more recently, or this year, than any other," Gary Levy, partner and hospitality industry practice leader at the accounting and tax advisory firm CohnReznick, said. "It's mostly driven by the fact that the minimum wage is going up."
The rise in base pay was a major factor for Joe's Crab Shack, a national chain, for doing away with gratuities at 18 of its more than 130 restaurants in 30 states since August.
"The no-tipping service model gets us above the fray with regards to the increased minimum wage conversations that seemed to be happening all over the country," Ray Blanchette, CEO of Ignite Restaurants (IRG), which runs Joe's Crab Shack and Brick House Tavern & Tap, told analysts on a recent earnings call. "This gets us way out in front of it.
Twenty states hiked the minimum wage at the start of the year, and more will be making the move in 2016. The state actions come amid inaction at the federal level, with the national minimum wage unchanged at $7.25 an hour since 2009.
In New York, the minimum wage for tipped restaurant workers is going up 50 percent, to $7.50 from $5 an hour on Dec. 31. The first state-mandated hike in pay since 2011 helps illustrate the divide between those working in the front of restaurants and those in the back.
Waiters and waitresses typically make the bulk of their income from tips, while chefs and cooks rely on hourly earnings for all their income. Danny Meyer, chief executive at Union Square Hospitality Group, or USHG, voiced support for leveling the playing field among a staff that includes also includes hosts, dishwashers and bussers in saying he was starting the process of getting rid of gratuities at his 13 restaurants.
"At fine dining restaurants, servers make $20, $25, $30 or $35 an hour, working 30 hours a week, and why do they need an extra $2.50 when the guy in the kitchen working a lot of hours is making $12 to $15 an hour?" Levy asked. "The service and the food are part of the whole, and that is what you're paying for. How do you level the playing field between people with different skill sets but both are important."
Unlike high-end restaurants, where tips based on a percentage of the check can be substantial, servers at Joe's Crab Shack tended to earn less than those in the kitchen, and the move to increase hourly pay while getting rid of tipping was also "driven by high turnover in the front of the house," David Catalano, chief operating officer at Ignite Restaurants, said.
At one of its restaurants in Indianapolis, the company eliminated tips, increased menu prices about 12 percent and hiked wages for servers, who now make about $14 an hour. The result: "Overall, we're seeing better guest traffic, sales, better retention," Catalano said.
"A lot of people in our industry take an entrenched position, but I'm not sure our guests are comfortable with stagnating the wages," said Catalano of resistance to raising the minimum wage.
"I think it's going to take time, like anything else," said Levy, who recalls the hand-wringing in the industry when smoking bans came into play and again with the Affordable Care Act.
"Everyone said, 'that's going to kill the industry,'" he noted. "Well, it's north of a $700 billion industry, and it's the second-largest employer in the nation of all industries, so it's not going anywhere."