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Is a service charge right for your restaurant?

Although service charges are now commonplace in San Francisco and increasingly appearing in cities ranging from San Diego to Boston, they may not be right for every restaurant.

Here are the questions converts and others close to the situation suggest restaurateurs asks themselves before deciding if a labor surcharge is right for their operation.

Does it pencil out?

Surcharge advocate Keith Harmon is also an accountant, so he took a long look at the numbers before deciding if a 3% service fee would be right for the three restaurants he co-owns.

“Since our kitchen payroll is usually 18% to 20% of our total revenue, if I could just take 3% from the top line and have it travel back into back-of-house compensation, everyone in back of house would get about a 15% to 18% raise,” he recalls calculating. “It would be significant.”

It might not have been if prices were lower or labor costs were different, he notes.

How will it impact other charges?

The money generated by a service fee usually counts as revenues, which means rents based on a percentage of sales will also rise. Taxes are certain to increase. Because wages will jump, so will FICA assessments.

“There are also things that are tied to wages like workers' comp—obviously, those rates skyrocket,” says Hinoki & the Bird’s general manager, Anette Yang. “So it involved talking to our insurance carriers.”

Many of those things can be renegotiated, she adds.

What’s the problem you’re trying to solve?

If the issue is the disparity between front-of-house and back-of-house pay, or if an establishment is trying to pass along a wage increase without raising prices, pick up a pencil and work the numbers. But “one of the first questions should be, ‘Are there labor problems that aren’t related to the server team?’,” says Harmon. A more equitable pay scale won’t necessarily turn a weak staff into a powerhouse.

Will your market accept it?

Hinoki & the Bird likely encountered less resistance to a 20% surcharge because it operates in Century City, a high-end location, says Yang. “It wasn’t as objectionable as it might be in a different neighborhood,” she says.

It helps if you’re not the lone trailblazer. “San Francisco is a good example,” says Stephen Zolezzi, the former operator who now serves as CEO of the Food & Beverage Association of San Diego. “They’ve been doing service charges for three of four years there. So they think nothing of it. For places that are not doing it, there’s probably a large gap where they don’t know, or know very little about it.”

Is your staff open-minded enough?

“I anticipated front-of-house freak out,” says Yang, acknowledging she wasn’t mistaken. “It’s not a matter of going over the numbers. The real issue is old-school thinking, to change that and the feeling, ‘Now I get paid by the hour?’” There’s a psychological adjustment that some servers can’t make because they see a return to hourly pay as a demotion.

Are you willing to be an evangelist?

You have to be transparent, and you have to couple it with an education program,” says FBASD’s Zolezzi. “And you have to be educated yourself—what are you doing, why you’re doing it, and what you expect the outcome to be.”

Is it legal in your area?

The laws that apply to tipping or any sort of pooling can be complex and a litigation attorney’s delight. Danny Meyer’s Hospitality Included model, for instance, is technically a profit-sharing program, since pooling is virtually outlawed in New York state.

Restaurants in San Diego learned early this year that service charges are legal, but require certain disclosures. They were threatened with sanctions unless they more carefully explained to customers how the proceeds would be used. Now, virtually every establishment has done so, says Zolezzi.

Check with authorities to see what’s legal.

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