Service fees catch hold as tipping alternative

“60 Minutes” turned its cameras this month on Danny Meyer’s plan for scrapping tips and paying merit-based wages to all employees, servers and kitchen staffers alike. But another model for leveling pay seems to be the one grabbing restaurateurs’ attention.

An increasing number of full-service places are trying to check labor costs and close the gap between front- and back-of-house compensation by adopting a service or administrative fee, a set surcharge levied on guest checks. Proceeds are distributed to employees, in effect giving them a bump in pay without any additional expense to the restaurant. The expense is passed directly to guests.

The approach sidesteps what experimenters have cited as the two major problems with all-inclusive pricing, or what Meyer’s Union Square Hospitality Group calls Hospitality Included.

Menu prices don’t have to be recalculated to cover employees’ wages, a time-consuming and arduous task that even USHG acknowledges is harder than anticipated. And with prices remaining the same, there’s little risk of customers recoiling from posted hikes of 18% to 22%, the usual range for places that have scrapped tipping to pay servers a wage instead. Many converts have seen customers balk at the new prices, even if their total charge is less than the old price plus a 20% gratuity.

In the first 19 months that Tres Gatos, Centre Street Cafe and Casa Verde added a 3% Hospitality Administration Fee to customers’ checks, the three Boston restaurants served about 160,000 guests, and “there have been less than 20 complaints,” says co-proprietor Keith Harmon.

Wages are up across the board, particularly sharply for the back of the house. The kitchen hourlies saw a boost almost immediately of $2.86 an hour. “For 3 cents on the dollar, the worst-paid people in the house can make 15% to 18% more money,” says Harmon.

Tipping wasn’t eliminated, to the relief of servers and many customers alike, he recalls. “The tip team, to their credit, were totally behind it,” Harmon explains. “Their attitude was, ‘I want them to make more money. I just don’t want them to take it out of my pocket.’”

A service charge and tipping weren’t as compatible for Hinoki & the Bird, a restaurant in the Century City section of Los Angeles with an average ticket of $70. In January, with the city’s minimum wage shifting upward in its staggered climb to $15 an hour, the restaurant added a service charge of 3.5% and did not discourage guests from leaving their usual 20% tip.

“That got a ton of flack from guests, because now they’re tipping 23.5%,” says General Manager Annette Yang.        

So the restaurant switched to a 20% service fee and informed customers they no longer needed to leave a tip.

“We had very, very little pushback—next to none,” says Yang.

But “some of our staff said, ‘Eh, I don’t think it’s for me,’” she continues. “We did have a lot of turnover in front of house. None in back of house.”

With every employee being paid a wage, the compensation gap between the front and back of house didn’t disappear, but it narrowed appreciably, Yang said.

And every employee welcomed greater predictability of their incomes, since take-home pay didn’t fluctuate with sales.

Still, the jump away from an entrenched way of doing business, the only setup most guests and customers have ever known, isn’t exactly a slight change.

“It was scary,” said Harmon.  “It got a lot of attention. There were some nasty comments on blogs.”

Misperceptions abound, including a fear on the part of customers that the restaurant is merely squeezing a few extra bucks out of them.

In addition to explaining the changeover via the menu, an operation making the switch has to ensure its servers are able to explain the setup to guests and answer any questions, Harmon and Yang agree. The waitstaff will also likely be asked for their assessment of the new model, and if they're not fans, guests may not become ones, either.

In the beginning, Harmon’s team talked at every preshift meeting about the reasons and results of the switch. At Hinoki & the Bird, “In the front of the house, we had a really intense transition period,” said Yang. “We did a lot of hiring and training and hiring and training.”

Switchovers will no doubt get easier, Harman says, as more restaurants adopt service charges and introduce that arrangement to consumers and the industry’s workforce. He says he knows of 17 restaurants in the Boston area that have taken the plunge since his three establishments adopted the fee.

“I’d guess a lot of restaurants, if not a majority, will go to a service charge model,” says Yang.

They’ll likely discover a welcomed side benefit, she and Harman attest.

“As managers, it’s made us much better in terms of knowing who’s good,” says Yang, noting that she now pays her servers more than $30 an hour. “At $10 an hour, if you have someone standing around, it’s not going to kill you. It’s a different story when it’s above $30.”

Agrees Harmon, “Because [the fee is] collected according to sales and distributed according to hours worked, it becomes a really effective way of measuring efficiency and a metric you can manage.” If, that is, the staff doesn’t do it for you, since their pay is now determined by factors like how many people are on a shift.

“They figure out how many bodies we need to work the night,” explains Harmon. “They’re thinking, ‘What are the right overlays of schedules and bodies to deliver the best level of quality?’

“Now they are part of the process,” says Harmon. “It was the best decision we ever made.”

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