Q&A: The legal considerations of no-tipping policies

No-tipping policies are making waves in the restaurant industry. While it’s not the first time operators have tried to do away with tips, some believe the time is right. “People are ready for a different system,” says Cristian Mora, co-owner of Girard in Philadelphia, which adopted a no-tipping policy when it opened in November.

But it’s not as simple as just getting rid of tips. There are a number of considerations, legal and otherwise, to take into account as well. Here, attorney Carolyn D. Richmond, co-chair of the hospitality practice group at Fox Rothschild LLP in New York City, addresses some of the questions and concerns surrounding traditional gratuity elimination.

What are some of the most important issues to take into account when entertaining the idea of starting with or switching to a no-tipping policy?

This has been a hot-button issue for some time and it is coming to an apex now with class-action lawsuits, talk of a $15 minimum wage, Obamacare, paid time off laws and abolishing tip credits. For any restaurateur contemplating a switch to “no-tipping,” there are a few key factors to consider:

  • What will be the reaction of your staff? Despite all the adverse press, when push comes to shove, most servers will likely tell you they like the risk/reward of holding out for that big gratuity, a reward rather than a charge.
  • Where will the money come from for an increase in wages? Restaurant owners who are considering this must sit down with their accountants and bookkeepers and figure out two sets of numbers: First, what is the average wage that tipped employees are earning, and what will you now have to pay as an hourly loss in tips. Second, where and how will you get the money to pay for that significant payroll increase? Increase food and beverage costs to the guests directly? Use of a service or administrative charge tacked on to the guest’s bill? Reduce headcount and cross-train employees to do more job functions?
  • How will the customer react to the increased costs?

From the legal perspective, are there any risks to no-tipping policies?

There are a number of legal concerns. First, a restaurant cannot actually “ban” tipping. While you can strongly discourage guests from leaving a tip, you can remove a gratuity line from a credit-card slip and can prohibit employees from putting out tip jars, at the end of the day, you cannot prohibit a guest from still leaving a $20 in a check fold or on a bar.

The problem for restaurants that get rid of tipping and switch to a service charge or no-charge-at-all policy is that they still need to contend with the possibility of a cash tip. If you start requiring servers to tip share … you end up right back in the legal landmine of who is entitled to tips. The best advice is to let the server keep the cash tip and do not require tip sharing—but still require IRS tip reporting.

What kind of potential legal ramifications could stem from no-tipping policies?

The IRS will likely be looking to make sure taxes are being handled correctly on any “charges” being assessed.

What are the questions you hear most from operators entertaining a shift to a no-tipping policy?

How will the customer respond to an increase in prices? Will I lose my best staff? Right now, those answers are a bit unknown, but as usual, the coasts are leading the way, and we are seeing a number of San Francisco, Los Angeles and New York City restaurants looking to change the systems in the first quarter of 2015.

What don’t operators know about such a policy? Are there any legal nuances that need to be considered when developing a no-tipping policy?

This is a loaded question. Until about 10 years ago, no one questioned how restaurants operated; a blind eye was often turned to those operators where cash wages, salary instead of overtime and tip pools that might have included the wrong job classification were the norm. However, all along we had a very intricate set of state and federal wage and hour laws that sometimes parallel consumer affairs and tax laws that affected tipping and the wages of restaurant workers. When the private lawsuits started coming in and Departments of Labor started poking around, some restaurant owners were slow to figure out the maze of laws. It is far from easy to understand the laws surrounding restaurant operations—it can be done, but it’s not easy.

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