No Tip? No Problem: NYC Restaurants Adopt New Business Model

Although tipping has long been the norm for the U.S. restaurant industry, famed restaurateur Danny Meyer recently announced that all of the NYC Restaurants in the Union Square Hospitality Group will eliminate tipping by the end of the year.

The policy change will impact 11 notable NYC restaurants, including the Gramercy Tavern, The Modern, and Union Square Café, as well as the 1,800 tipped employees that work in such establishments.

Although there are a number of factors driving this no-tipping business decision, New York’s end-of-the-year tipped employee minimum wage hike from $5 to $7.50 is undoubtedly a major factor. Although many servers at high-end NYC restaurants earn substantial money as tips, little of this will count towards the employer’s responsibility to compensate, even though the tip credit has been an ingrained element of restaurant economics. Restaurant owners also face anticipated increases in the minimum wage for fast-food workers up to $15 an hour, which may tempt kitchen staff to seek higher paid positions at those establishments.

For restaurant owners, eliminating tipping arguably offers a number of advantages. For one thing, it makes employment law compliance and record keeping much less complex. Rather than navigating a dizzying maze of local, state and federal wage regulations applicable to tipped employees, members of the wait staff would be treated like all other non-exempt, hourly workers.

Mr. Meyers further explained that, by raising menu charges for food and beverage to include a service component, the employer is able to reallocate total revenue to narrow the earnings gap between those who make the food and those who serve it. Under the Fair Labor Standards Act, gratuities paid to servers cannot be shared with non-tipped employees, such as kitchen staff. “The gap between what the kitchen and dining room workers make has grown by leaps and bounds,” Meyer told the . During his 30-year career in the NYC restaurant industry, “kitchen income has gone up no more than 25 percent. Meanwhile, dining room pay has gone up 200 percent,” he added.

For wait staff, the response is largely mixed. Some would prefer to earn a predictable wage, which eliminates the fear that a slow night can result in a low paycheck. However, other servers are wary that no-tipping policies will eliminate the “upside” income opportunity that comes with big tips for good service.

There are different variations of a no-tipping policy. For instance, Dirt Candy, which is located on the Lower East Side of Manhattan, adds an “administrative fee” of 20 percent to each check. Under the law, if proper legal notice is provided, this is not a “tip” which is defined to be a “voluntary payment made by the patron to the server.” Whatever the name, an imposed service charge is a tip and can be credited to meet the employer’s minimum wage obligations (some jurisdictions will not permit a reallocation of the service charge to pay other employees however). Dirt Candy’s fee helps cover the $15/per hour the restaurant pays its waiters, waitresses, and bar staff. Other eateries are experimenting with raising food prices and imposing other types of services charges.

In the end, Mr. Meyer’s bold move will certainly warrant close attention by the restaurant industry, both inside and outside of the New York City metropolitan area. A crucial factor for success will be whether customers are willing to pay higher prices in exchange for eliminating the need to tip. NYC Restaurants would face potentially higher withholding tax obligations and would no longer be eligible to claim the favorable FICA tip credit. It also remains to be seen whether employees will be willing to work at an establishment which offers higher hourly rates that does not match the potential upside offered by tips.

To discuss how a no-tipping policy may impact your labor compliance obligations and costs please contact attorney Gary S. Young

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