The US Tip System

Unlike Europe, where servers are often paid a set hourly wage, the most common and accepted way to pay servers in the US is through Tips.  Some employers are allowed to pay servers a special low sub minimum wage ($2.13) and diners are expected to leave a tip that is based off a percentage of the total amount of the check.  The customary rate is 15 to 20 percent.  Although diners are free to leave nothing at all and the tip system is voluntary, leaving a tip has become a integral part of  US dining culture. Restaurants have a unwritten agreement with  the dining public to pay for service by leaving a tip and thus subsidizing  the wage of the server.  Most restaurants in Europe and other parts of the world do not grant the diner this option, they simply integrate a service charge into the price of the meal.   As a result, dining in Western Europe is considerably higher and less affordable than in the states.   The US tip system is unique in this way-  It allows the patron to decide whether or not to  pay for service and also allows servers to potentially earn much more than some European servers because income is based off a percentage rather than a set, fixed hourly wage.   But this tip system did face many challenges when first introduced as an alternative to the European model.

The biggest  challenge was to allow servers to retain their tips instead of handing them over to their boss.  Elizabeth Williams, author of “When the IRS came to dinner”, explained that common law historically regarded a tip as gifts to servers,  but many were coerced into surrendering their tips.  But in  1942, the Supreme Court affirmed  that employees had exclusive claims to their tips in Williams v. Jacksonville Terminal Company.This set the stage for a work culture and  environment very different than Europe.  With this built in incentive to sell off a percentage of sales, service in The US  quickly developed into outstanding,  distinctive  service.

Fred Harvey, known for vastly improving the standards of  dining on railroad cars and  train stations recognized the importance and value of great service.    In the 1920’s and 30’s,  Harvey Houses, were  known world wide for their superior service  and offered some of the best training and wait positions during the Great Depression.  And these servers,  known as  Harvey Girls, were  able to earn enough to attend college or start up businesses of their own after completing a six month contract.    They were not perceived as food prostitutes, but rather well behaved ladies who had curfews imposed upon them.  They would sneak out their windows to meet up with a lad, but if they were discovered, the scandal resulted in thier termination and bus ride home.

It was a time in the US when waiting tables offered anyone with or without a college degree an opportunity to earn a living wage- most notably women. It was a trade embraced by women who saw few other opportunities to earn their living. Customer preference for female waitresses helped women dominant and remain firmly planted in the occupation  even after the second World War when women were relinquished from other non traditional occupations.   And the culture of tipping was embraced by the public who preferred the freedom to decide how much or little to tip a server thus allowing the diner to essentially “vote” with their tip or lack of one.

But today, The concept that a server really has much control over their tips is an illusion.  According to Williams, “Congress has succeeded in redefining tips.  Tips are no longer gifts for service.  Now they are treated as supplemental pay, subject to full taxation like any other earned wage”. And employers are allowed to use tips to subsidize the wages of other employees,  pay a  reduced wage to servers and even cover the cost of doing business by deducting a percentage  from a servers credit card tips for processing fees.

The Sub-minimum wage and the Tip Credit

In 1966, Congress added restaurant tipped employees to the FLSA (Fair Labor Standards Act) and created the concept of the “Tip Credit”.  The Tip credit allows employers  in most states to meet their main wage obligation by having a certain amount of tips count toward the applicable minimum wage. It means servers receive a special, sub-minimum wage that is lower than the full applicable minimum wage. This special sub-minimum wage (federal $2.13) + servers  tips (tip credit) minus a tip pool, must equal or exceed the full applicable State or Federal minimum wage.

The tip credit was supposed to only allow employers to credit a certain amount of an employees’ tips to the employer. It was argued that employers create the conditions that enable tipped employees to earn tips and as such, employers should be allowed to financially benefit from some of the tips their employees receive from customers.  The original bill only allowed employers to credit tips to themselves by an amount up to half of the applicable minimum wage.

Today, in some states,  an  employer can count $5.12 an hour of  a server’s wage towards the full federal minimum wage of $7.25.   Although historically,  the tip credit  was set at 50 percent, its rate varied and was at its lowest in 1980 at 40 percent.  Today, the tip credit is at its highest at 68 percent.

In 1996 when restaurant lobbyist  successfully  froze the Federal sub minimum wage at $2.13, the tip credit  steadily increased.  And when the last  federal minimum wage increased in July of 2009 to $7.25,  the tip credit, not the sub minimum wage did increase again.  Raj Nayak, a counsel with the Economic Justice Project at New York University School of Law, points out  in his essay, “Still waiting for a raise”,  that the federal sub minimum wage hasn’t been increased in over 16 years. Nayak said ” in 1996, when Bill Clinton shamed House Speaker Newt Gingrich and congress into raising the federal minimum wage, republican lawmakers sided with restaurant industry lobbyists and excluded tipped workers by permanently freezing their minimum wage at $2.13.   If congress were to restore the tipped worker minimum wage to its historic level of at least 50% of the federal minimum wage, it would then have  risen  to $3.63 last  July of 2009.  And if employers were required to pay a base wage of at least half the federal minimum wage, said Nayak ” it would guarantee a stable income that would automatically be adjusted as the minimum wage went up”.

Some states,  such as Maryland($3.63 hr)   have established minimum wages above $2.13 an hour for people who work for tips and seven states even require that tipped workers be paid the full minimum wage. “None of these states” said Nayak “have found that it hurts business to ask employers to pay tipped workers a fair wage”  According to the National Restaurant Association, some of the states with higher sub minimum wages for tipped employees -Arizona and Colorado- are projected to see the fastest growth in restaurant jobs over the next 10 years.

The tip credit was also argued;   that by allowing employers to pay a lower sub-minimum wage to servers;  they are able  to afford pay a living wage to the back of the house employees, such as cooks, dishwashers and janitors.  And when the tip credit is applied correctly, it can help restaurant owners sustain a profit.    But one typical problem in the US today is that there are many restaurant owners who take the tip credit but who also require that tipped employees  share their tips with the back of the house. Essentially, they pay a lower wage to the tipped employees AND require that these tipped employee also subsidize the wages of the back of the house.  While this practice is illegal and violates the provisions of the Fair Labor Standards Act, it is widespread among restaurants.

Some states such as New York are starting to enforce the tip credit provisions more diligently. New York State’s labor commissioner, M.Patricia Smith, called the violations widespread and serious. “Its clearly a problem”, she said. “Its reached a tipping point in the industry. When it becomes the standard practice to cut corners, then everybody starts doing it.” Today,  NY has volunteer groups who visit  restaurants and look for wage violations.

Working with out the tip credit. (Equal States)

Seven states, (Alaska, California, Minnesota, Montana, Nevada, Oregon, & Washington) do not allow a tip credit. Restaurant owners are prohibited from taking the credit and must pay their tipped employees the same applicable minimum wage as other non-tipped workers.

In San Francisco, which has one of the highest minimum wages in the country. ($9.14 hr), some restaurant owners started adding a service charge to the bill.  They argued the wages in the Front of the House were much higher than the back of the house and that this caused tension among the workers as they could not afford to pay a higher wage to BOH employees. They argued that by adding the service charge, they could subsidize the wages of the back of the house, easing tensions and lower turn over rates.

But then in February of 2010,  the  9th circuit court ruled that tip pool restrictions no longer apply to employers who do not take the tip credit.  This meant employers who did not take a tip credit could now require that their tipped employees share tips with non-tipped employees.  While this ruling allowed employers to distribute tips among all the workers and perhaps eased tension, the court failed to impose any limitations on the amounts the employer could require tipped employees to share with non-tipped employees.  When a Oregon Waitress, Misty Cumbie challenged her employer’s tip pooling scheme under which the kitchen staff received more than 50% of server’s collected tips and the servers were only able to recover 30% to 40% of their collected tips, the court ruled in favor of the employer, stating:  “Naturally, she would prefer to receive all her tips, but the FLSA does not create such an entitlement where no tip credit is taken.”  The court did not impose a cap on the amounts employer could require from tipped employees to contribute and share with other non-tipped workers, presuming that the waitress would prefer receive all her tips.

This regulatory gap was addressed in Field Assistance Bulleton (2012-2) released by the Federal DOL on February 23, 2012.  In the memorandum, its states “that the employer is prohibited from using an employee’s tips, whether or not it has taken a tip credit ….” and also states” the purpose of this memorandum is to advise staff …new regulations addressing ownership of employee tips …. should be enforced uniformely across the country, including in states covered by the Ninth Circuit…”(DOL 2012). Tipped employees who live in equal states that do not allow a tip credit and want to protect thier right of ownership of tips may not be able to assert those rights in state courts. Colorado, for example has a state law (s8-4-103 (6))  that allows employers, who do not take a tip credit,  to take ownership of a tipped employees tips if they display signs in the place of business that informs patrons that tips are not the property of the server and belong to the owner. When WW contacted CO Dept of Labor and asked why they have a state law that clearly conflicts with Federal Law reqarding ownership of tips, Peter Wingate, Deputy Director of Colorado Division of Labor responded in a email, “The division refers all situations in involving potential violations fo the FLSA to the District office of U.S DOL and also educates employers that posting posters on ownership of tips will not shield them from Federal violations.”   Wingate also explained “the CO Division of Labor cannot change the underlying law, {such as the ownership of tips} absent a statutory change”. Tipped employees who live in states that have not adapted thier state laws to match Federal laws will need to look to the Federal DOL for protection.

Tips and Tip Pooling

Tip pooling in the US is done a number of ways.  The most common is requiring servers to tip out to support staff based on a percentage of  tips received.  Another common practice to require a tip out based on percentage of sales. and the third method involves servers surrendering all of their tips to a general tip pool which then is distributed evenly among staff.

Traditionally,  most servers are expected to share a portion of their tips with bussers, food runners or hosts; basically the support staff  that is directly involved with service. Tip out rates have generally been 15 to 30% depending on the amount of support staff.    But  after the 9th district court ruled that tip pool restrictions no longer apply to employers who do not take a tip credit, the court asserted that cooks, dishwashers and even janitors are now considered part of the chain even if they are not involved directly with service.

The “chain of service” idea was first introduced in 2006 when Steve Wynn of Wynn Inc, decided managers were entitled to a portion of the dealer’s tips.  Traditionally dealers have always used a toke party, consisting of dealers themselves who count the tips and disburse them among all the dealers. But Wynn decided to allow managers to count these tips instead, take a portion for themselves and then disburse the tips among the dealers.  This out raged the dealers who make minimum wage and depend on their tips as their main source of income, while managers earn a much higher wage. The dealers argued that this practice violates State and Federal Laws.  The Nevada State Labor Commissioner ultimately ruled in favor of Wynn and the dealers are currently appealing the decision.

Tip pool restrictions which previously disqualified certain employees such as managers  from participating in tip pools in cafe’s and restaurants also no longer always apply.  Supervisors are now allowed to participate in a tip pool if they do not have authority to hire or fire new employees and perform nearly the same tasks of other tipped employees.  Last year, Starbucks won a reversal of a $100 million tips verdict.  “Supervisors essentially perform the same job as baristas, so they may receive a share of tips”, the California Court of Appeals in San Diego ruled.

Credit Card Tips

A server definitely has less control over credit card tips than cash tips.  Unlike cash tips which are generally received the same day, a employer may withhold credit card tips until the next pay period. They may also charge the server a processing fee to receive those tips.  The industrial standard is 3 percent. They are not allowed to charge a processing fee that is higher than the rate determined by the  credit card company or bank.

Servers also have less control over what they contribute to a tip pool with credit card tips. In some cases,  employers will  automatically deduct a percentage from a servers’ credit card tips based of sales rather than actual tips received for a tip pool.  This means if a diner runs up a $200 tab, but leaves no tip, the employer will still deduct money for a tip pool regardless, because they are basing it off sales rather than tips.  The server is essentially assuming the risk, not the support staff or the restaurant.

Working without the Tipping System.

While  uncommon, some employers elect to pay their servers a set hourly wage rather than directly through tips.  A service charge may be added to a customers bill and the employer may decide how much will be disbursed to the server.  This  compulsory or mandatory charge for service is considered a part of the employers gross receipts and  is considered property of the employer.  The restaurant can choose to keep the entire service charge or disburse just a portion to the server.  And when a server receives  a portion of the service charge, this payment is considered a commission, not a tip.

Deciding how much to tip the server is still a  strong preference among 80% of people surveyed by Tim Zagat, chief Executive of Zagat Survey. And while most restaurants will usually only impose the service charge for large parties or special catered events, some famous restaurants are now electing to add a full service charge. (15% or more) Thomas Keller of Per Se and Alice Waters of Che Panise are two owners that conduct the practice.  Mr. Keller explains, “Instead of worrying about how much they take home on a particular night, the waiters and all the other employees will earn steady wages, even for weeks when the restaurant is closed.”  But Tim Zagat said, “Few restaurants are likely to follow Per Se’s lead because few are confident enough of the quality and consistency of their food and service to get away with it.”

But what if a server works at a  restaurant  that adds an automatic service charge to a customers bill and they leave more?  Then this becomes a tip regardless of the restaurants policy and belongs to  the server. This tip, under FLSA provisions is protected as exclusive  property of the server.  Gilbert E. Pilgrim, the general manager of Chez Panisse explains, “Many customers leave more.  Indeed, if anybody leaves a tip of  more than 5%, a waiter will ask if the customer understood that he had already been charged for the service. If not, it is returned. The waiters are free to keep all intentional tips and to split them with the rest of the staff as they choose”.

On the positive side, a  restaurant that elects to use the service charge  and guarantees a server a certain percentage of that service charge can still preserve a servers incentive to sell, along with a stable income.   This would still differ from the European model that does not offer a commission, but just a flat hourly wage.   On the negative side, some restaurants may impose a service charge that may be perceived by customers of going directly to the server, while the server may only receive a small portion or even nothing at all.

Although some states such as  Washington have a state law RCW 19-48-130 to protect servers by requiring employers to inform their patron if the employer is pocketing some of or all of a mandatory service charge added to their bill. (Management keeping monies defined as gratuities is a violation of federal law)

One thing seems clear, if  the concept of  a full service charge  is to take root in U.S. the incentive to sell must somehow be preserved and the server’s percentage of a  commission protected.  Then maybe a tip will return to what it was originally intended: a gift for good service.

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