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Suggested tips vs. automatic gratuity

tip jar

Question:

We no longer add an automatic gratuity to large party checks, but instead list "suggested " tips at 15, 18 and 20 percent, at the bottom of the guest check. My servers don't like this because they feel guests typically tip on the total check, which includes sales tax, and their tips will be less. My argument is that servers should not expect to be tipped on sales tax, since they do nothing to generate that charge, and their tips should be based on food and beverage sales, and of course quality of service. Am I wrong?

– Stephen, Owner, S&D Management, Inc.

Answer:

From an operations perspective, it is smart to get rid of the automatic gratuity (“auto grat”), since the IRS considers it a service charge,  increasing the paperwork burden and your payroll tax commitment.  Many other restaurants are doing the same. Like you, many are suggesting tips at the bottom of the check, a practice that is allowable under the new IRS rule, since it leaves the choice of how much to tip to the guest.

The general sense is that servers lose in this change, especially in restaurants that attract international tourists or where high-ticket beverages are sold.

The auto grat would also have been applied pre-tax so your servers’ concern seems to be one of how the suggested tip is communicated rather than the overall change from auto grat to tip.

One way to better answer this question is to actually look at the numbers to see if your servers’ perception is valid. I have worked in and with restaurants where any change seems to get servers complaining that it will hurt their tips. Choose a month of parties of 6-or-more from your POS data and compare the credit card tips to what your old auto grat would have been. It is possible that at your particular restaurant you don’t even have a problem—or not a significant one.

If, in fact, you find servers are taking a big hit with the change, talk with them about how to communicate the new tipping policy with guests, being sure to let servers know the change stems from an industry-wide response to a change in tax code rather than some sort of managerial whimsy. While they may not like the change, they are likely to encounter it if they work for your competitors as well.

More on the auto grat to tip conversion here.
 

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