Big problems for small tips

A flawed compensation system can lead to several issues including inequity, rivalry and leadership challenges, says one study
By Sarah Dobson
|Canadian HR Reporter|Last Updated: 09/23/2016

By Sarah Dobson

They may appear as a small item on the bill, but tips represent a huge challenge in the restaurant industry. And a recent study suggests there are several operational issues arising from tipping that include inequity and unfairness, a loss of control of service quality and difficulties in succession planning and promotion.

“If tipping is to continue, restaurants will continue to have to manage the significant issues that arise. The industry needs to take a hard look at the best model for customer interaction and staff remuneration for long-term success,” write the authors and University of Guelph professors Bruce McAdams and Michael von Massow in Ontario.

Results
The two academics found tips represent a significant portion of servers’ income — particularly since a portion of the cash tip income is unlikely to be reported and taxed — in interviewing 52 restaurant managers and 47 servers, along with surveying 160 restaurant servers, mostly in Ontario but also in others parts of Canada and the United States.

Seventy-five per cent of the respondents made more than $10 per hour in incremental wages from tips, while 50 per cent earned more than $15 per hour and 25 per cent earned more than $20 per hour.

The practice of “tipping out,” where servers share a portion of their tips with other staff, is very common, and most often the tips are shared with front-of-house staff such as bussers, bartenders or hostesses, along with kitchen staff including cooks and dishwashers. 

But, for the most part, the back-of-house staff receive a smaller portion of the tips, representing about $30 to $50 every two weeks.

Tipping out the “house,” meaning tips are also shared with managers and owners, happens in about one-fifth of the cases, found the researchers.

And most servers (89 per cent) agree tipping out is fair because others add value to the service experience. However, 51 per cent feel the tip out they pay is too high — the average level is between 2.1 and three per cent of sales, found the authors.

Operational issues
Through the interviews, McAdams and Marrow identified a number of operational issues arising from the practice of tipping:
Inequity of value distribution

The inequality of wage distribution was highlighted by managers as a particular challenge. Servers were making an average of $26 per hour with tips included, while cooks earned an average of $11 to $16 per hour, earning about $1 to $3 in tips per hour.

If a person goes to a restaurant and spends $85 on dinner, with a tip of $15, the restaurant gets $100 for the value of the meal but $15 of that is beyond its control and goes to the server who, on average, can make up to $27 or $28 per hour with tips, says McAdams.

“The owners don’t have control of that money to say, ‘Hey, we’d like to redirect $5 an hour of that to our cooks.’”
Second compensatory system
Using a tipping out system creates a second compensatory system where the tips create income for servers. This can lead to relationship issues such as jealousy and animosity, says McAdams, citing “the amount of time that managers actually had to spend at work managing issues that came up because of tipping and how much time they had to sort of manage the actual payroll system, the compensatory system.”

There are also tax liability concerns with this arrangement, he says.

“From a compensation point, once you take control of a tip as an owner or a manager, you have to withhold the employee taxes so EI and CPP and everything on it. And if you don’t, you’re liable, so there are restaurants that are actually doing this and there are huge risks by tip sharing.”

Lack of control of revenue, rivalry
With the tipping system, different approaches to rewarding performers have emerged, such as good shifts — with a high potential for tips — being given to good performers, say the University of Guelph authors. 

But this can lead to resentment from others, and make it challenging to have good performers in poor shifts.

It can also cause variability in service quality and see managers playing favourites with servers while also controlling income by assigning shifts or cutting specific staff early, said the authors of “Tipped Out: How do Gratuities Affect Restaurant Operations?”

Tip “ownership” can cause unhealthy rivalry between staff, with tensions around the transferrance of a bar tab to a table, for example, or issues around large parties that tend to tip less or servers competing for guests who look like good tippers.

Quality management
Since tips are outside of management control, it is difficult to manage service quality, and servers may tailor the service experience to their perceptions of the size of the tip.

“Tipping can create individual goals versus organizational goals, or have servers work towards individual goals, so they would work for themselves. And in the restaurant business, managers often say, ‘Treat your section like your own business,’ but we studied restaurants where… servers wouldn’t take care of guests at the front door and sections other than their own because they were just worried, or walk food, unless it’s their table, unless it’s their section,” says McAdams.

“So, as an employer, if you have people not trying to work for the long-term organizational goals, they’re working for their own short-term gain — it’s not really good alignment.”

This can also mean a lack of teamwork, with servers neglecting to help each other. And there’s the phenomenon of “quota servers” who have a fixed tip total in their minds and once that’s achieved, they shut down and service quality declines.

On the other hand, tipping can help with labour costs, as it’s easier to get servers “off the clock” during slow times because there’s less motivation to stay.

Career management
Managers can have difficulty promoting servers to salaried positions because of the possibility of earning tips as servers, says McAdams, which makes succession 
planning and leadership development extremely difficult for restaurant owners and operators.

“It’s incredibly difficult to find restaurant managers because people would rather work as servers — they make more money and they work less hours,” he says.

Managers may look out on the floor and say there are six good people who could become leaders, says McAdams, but the people will decline, saying, “’Instead of working 30 hours and having flexibility and making very good money, I’ll have to work twice as long and make less money’ so there’s really no motivation for people to move up the ranks, so there’s also a real shortage of quality restaurant managers.”

And in the kitchen, low wages make it difficult for employers to retain chefs who are keen for better hours and better pay.

“This is actually the tragic part is you have higher enrolment in culinary schools now, colleges for the most part, than ever before… and they take a one- or two-year course in culinary, they come out and they’re making $12.50, $13 per hour. Two years later, they’re making $13.50 an hour and they realize pretty quickly there is no future, there’s no living wage there,” he says.

“That is a very, very common problem that is actually at the crisis level, I think.”

The ability to earn tips also appears to attract transient staff keen on the prospect of quick, easy money, says McAdams.

“We’re at the point now where we can say tipping is the lead cause of the transient nature of the full-service restaurant business in North America.

“In North America, we have this huge turnover in our kitchens because of low wages, we have huge turnover in the server position because a high percentage of servers are what I call mercenary servers — they come into the industry because serving is quick cash and ‘I need to pay off my student loan.’”

Possible solutions 
About 20 years ago, restaurants started saying managers should be better paid by receiving a share of tips as servers were taking an inequitable amount of the wage pile. But that led to animosity as often the managers worked behind the scenes while servers were busy on the floor.

“Honest to God, it creates this organizational chaos and it was amazing to us how much time that managers told us they actually had to spend over solving issues and clearing things up and sorting things out and conflict management because of this practice of tipping that could, for the most part, be alleviated if we went to a non-tipping system and paid people wages,” says McAdams.

That’s one possible solution, which would see, for example, a 15 per cent increase to menu items and a no-tip policy. But the problem there is “sticker shock,” says McAdams, as restaurant owners worry customers will go to the competition if they have lower prices (and tipping).

And a 15-per-cent service charge to the bill, with no tips, means customers often resent having to pay a fixed service charge and not having the flexibility to tip at their own rate.

But restaurants could pay higher hourly wages for all staff. Servers would then be willing to work any shift because they’re compensated the same and “that gives management and ownership that 15 per cent as part of their revenue — and that works,” says McAdams.

Another solution is to stop raising minimum wage rates for servers, so “the owners would have more money to pay less hourly wage to the servers and more hourly wage to the cooks,” he says. 

“Unfortunately, when you raise the wages of the servers, you’re actually taking away the ability of owners to give more money to the cooks where it’s needed and… you’re giving servers more money that they really don’t need, and taking away the owner’s ability to pay the $16 for the cook. ‘I have to pay my servers $10 an hour so I can’t pay the cook $15. And they don’t have control of that money.’”

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