Tipping

Tips, or gratuities, are a traditional element of pay for many employees within the hospitality and tourism industries. They are discretionary payments made by the customer directly to the employee in recognition of the quality of the service provided. There are, however, some cultural/national variations in tipping customs; tipping is expected in some cultures and not in others. Tipping must not be confused with service charge, which is imposed by the employer as a means of increasing revenue, and may or may not be redistributed to all employees.

Tipping is most prominent where there is a direct and personal service to the customer, and so its significance to the employee may vary from one sector of the industry to another and from one job to another. Hotels and restaurants are the most likely businesses where tipping may form a substantial proportion of take-home pay, whereas bars, pubs, clubs and contract catering outlets may attract few gratuities. The job categories where tipping may be at a high or varying level are in food and beverage service, luggage porters and concierge, whereas back-of-house positions and departments such as housekeeping normally attract few tips.

Although in many cases the individual employees keep their own tips (and handle their own income tax declaration), there are also systems of pooling the amounts, sometimes known as the tronc, to be divided out at regular intervals on some preagreed basis. A points system often prevails where senior and long-service staff may receive a larger share of the pool. Such a system may also include the non-service workers, in recognition of their contribution. If such a pooling arrangement exists, it is necessary to appoint a senior member of staff to be the official supervisor of the pool, to ensure propriety and to deal with taxation issues. In addition to cash being given by customers as a tip, it is increasingly the case that an amount may be added to the bill by customers and thus paid as total settlement of the bill via cheque or credit card. Here, the onus rests with the employer to redistribute these non-cash tips as additional pay through the normal wages system.

Tips are voluntary payments made to service providers after they have delivered a service product. In American restaurants, it is customary to tip a waiter or waitress 15–20% of the check amount. These restaurant tips amount to approximately $20 billion a year and represent nearly all of US waiters’ and waitresses’ take-home pay. Even in countries with less generous tipping norms, tips often make up a substantial portion of servers’ incomes. Thus, tipping is an important issue to restaurant servers around the globe. It should be a concern of restaurant managers as well. Tipping affects servers’ attitudes and behaviors as well as customers’ dining experiences, so it should be managed to maximize employee motivation and customer satisfaction. Tipping also affects restaurants’ legal responsibilities with respect to income and social security taxes, so it should be carefully monitored and recorded by managers.

Many restaurant managers rely on tips to (a) motivate servers to deliver high-quality service, (b) measure server performance, and (c) identify dissatisfied guests who need grievances addressed. These uses of tips assume that tips are strongly related to customers’ perceptions of service quality. Research has not, however, supported that assumption (e.g., Lynn, 2001). In fact, customers’ service ratings account for only about 4% of the variability in a restaurant’s tip percentages, so tipping should not be relied upon to accomplish the previously mentioned goals. If managers cannot rely upon tips to reflect service quality, they can nevertheless rely on good tips to help keep servers happy and motivated. Moreover, managers can increase their servers’ tip incomes by providing the servers with appropriate tools and training. For example, researchers have found that servers in casual dining restaurants earn larger tips when they introduce themselves by name, squat down next to tables, touch customers on the shoulder, smile at customers, joke and play games with customers, call customers by name, write or draw on the backs of checks, deliver checks on tip trays embossed with credit card logos, and give customers after-dinner candies. Managers who train servers to do one or more of these things and who provide servers with the appropriate tip trays and candies can increase their servers’ tips by 20% or more. The effects of this increase in tips on servers’ morale include reducing server turnover and improving customer service (Lynn, 1996). In addition to employing the techniques mentioned in the previous paragraphs, servers unfortunately can also increase their tip incomes by (a) focusing on customers at the expense of their other responsibilities in the restaurant, (b) hurrying customers in order to turn tables quickly during busy nights, (c) stealing food and drinks that are given to customers free of charge, (d) ignoring or spending little time on groups considered poor tippers, (e) refusing to work during slow shifts, and (f ) under-reporting their tip incomes for tax purposes. Thus, tipping may actually reward behaviors that most restaurant managers would consider undesirable and managers of tipped employees need to keep a watchful eye to identify and discourage such behavior.

In particular, restaurant managers in the United States need to monitor and record their servers’ tip incomes because they are responsible for withholding income taxes on tips and for making social security contributions based on tip income. Recently, the US Supreme Court ruled that the IRS can audit restaurants (rather than individual servers in restaurants) and hold them responsible for paying social security taxes on undeclared tip income even when those undeclared tips cannot be attributed to a particular server. This has substantially reduced the cost to the government of collecting taxes on undeclared tips and has substantially increased the costs to restaurants of under-reporting tip income. As a result, many restaurants enter into agreements with the IRS in which they work with the agency to estimate their servers’ tip earnings, educate employees about tip-reporting responsibilities, and set up procedures for reporting tip income. In exchange, the IRS agrees not to audit the restaurants’ tips as long as the agreements are in effect.

References

Lynn, M. (2001) Restaurant tipping and service quality: a tenuous relationship. Cornell Hotel and Restaurant Administration Quarterly, 42, 14–20.

Lynn, M. (1996) Seven ways to increase your servers’ tips. Cornell Hotel and Restaurant Administration Quarterly, 37 ( June), 24–29.

Further reading

Boella, M., Calabrese, M., Goodwin, C. and Goss-Turner, S. (1996) Catering Questions & Answers: Employment Law, Kingston-upon-Thames: Croner Publications Ltd.