Tipping in UK Restaurants: Time for a Change?
The news cycle is churning through some classic hospitality industry debates at the moment. Only the other week tap water was on the agenda and I wrote my take on that issue here. This morning the business secretary Sajid Javid has announced the government is taking a stance on service charges and tipping in UK restaurants, specifically looking to simplify the system and add transparency.
This announcement comes on the back of press coverage over the last 12 months of restaurants with some slightly opaque policies and practices when it comes to sharing out tips, including processing and handling charges.
It is not clear what the government plan to do about the issue, but they are opening a consultation.
Recently Jay Rayner wrote an article in The Guardian suggesting that service charges and tipping in UK restaurants should be removed and the industry should join 99% of other sectors by factoring all costs into a meal and offering one clear price.
In America it’s also hot news in the industry as restaurant groups such as Danny Meyer’s Union Square Hospitality Group are taking their venues to a ‘Hopsitality Included’ model. You can read a very in depth piece from NY Eater magazine on the reasons behind this decision. The article is interesting (if you like this kind of thing) although some of the drivers are particular to the US industry – especially the discrepancy between front of house and kitchen pay which I don’t believe to be as much of an issue in the UK. Also worth a mention is the ludicrously low ‘tipped minimum wage’ in the US which at $5/hr is less than half the new National Living Wage.
I suppose I should disclose our own policy before going further:
At both Norse and Baltzersen’s all tips are pooled centrally and split equally between every member of staff that works a shift. Tips are recorded and allocated on a daily basis then processed and given to staff in their pay monthly. Virtually all tips are given freely so VAT is not due but deductions are taken for National Insurance and income tax as applicable.
Baltzersen’s is a counter service café; the vast majority of customers do not tip. A full-time member of staff can expect to receive around £30/month.
For a member of staff working at Baltzersen’s on the National Living wage tips represent around 3% of their earnings.
Norse is a table service casual fine dining restaurant, most guests leave a tip and a full-time member of staff can expect to receive around £300/month.
For a member of staff working at Norse on the National Living wage tips represent around 26% of their earnings.
So, let’s look at the issue of moving to a no tipping or ‘Hospitality Included’ model from a few angles:
Increasing pay to cover the gap left by tipping is on the face of it a reasonable idea for staff. It means they know what to expect on a monthly basis and can make plans based on that. It benefits staff that work quieter shifts (at most restaurants these would be mid-week) who perhaps would previously have received a smaller amount of tips on that evening because the restaurant does less business.
To play Devil’s Advocate you could say that part-time weekend staff now receive less for their work because some of the money from their busy shift will subsidise pay for other evenings.
There is no difference for staff at Baltzersen’s/Norse when it comes to tax and NI because they already pay this on tips, this would be the case for most staff in national chains too.
Another factor to consider is how a wage increase would be applied. Restaurateurs will likely look at tips over the previous year and decide on a reasonable pay increase funded by increasing prices. If the restaurant continues to grow over the next 12 months and the staff are working hard to provide excellent service for an increasing number of guests they will not receive any benefit through their pay unless it is linked to performance. If the old tips system was in place then they would naturally have received more tips for servicing more guests.
In summary restaurant staff would benefit from a steadier and more predictable level of earnings, but their wages would be slower to respond to growth in a successful business (and on the flip-side decline in a failing one).
The introduction of the National Living Wage across the UK has improved the terms of the lowest paid workers in the country, I wrote about it here.
If restaurants moved to the ‘Hospitality Included’ model they would increase basic wages for all members of staff and this would mean that the mandated NLW increases, as we move towards the target of £9/hr by 2020, would likely already be covered. It could therefore have a positive effect on wage bills for restaurateurs but a perversely negative effect on overall remuneration for hospitality staff as businesses won’t be forced to increase their basic pay. Although there is an argument to say that the labour market would correct this naturally especially in areas where competition for staff is high.
Even though the national chains have taken a bit of a hammering over their administration charges for processing tips the fact remains that it does cost time and money. Whether guests pay by cash or card it costs the restaurant to process that transaction via a card fee or to pay into the bank as cash. It takes time to record tips on a daily basis, calculate it all correctly at the end of the month and apply it to payslips. Under a ‘Hospitality Included’ model the admin time is removed and only the processing fees remain.
If current tip levels are 10% of takings, due to the vagaries of VAT, I would need to increase prices by 12% across the board to cover an equal increase to wages. Making sure guests know that hospitality is included would become very important because it’s unlikely to be legislated, so many restaurants wouldn’t choose the system and would be able to maintain prices at current levels.
To compete for staff new restaurants would need to base their pay levels on the expected level of business they will do, even though that level of business may take 6-12 months to materialise as the restaurant becomes established.
Restaurateurs moving from a system when staff keep their own tips would have to think of new ways to reward their highest performing staff because they would no longer have the ability to improve their pay by performance alone.
Increasing wages in the fine dining/table service area of the sector sounds great, but not if you operate more casual venues like cafes or coffee shops. Places where tipping is not usually part of the experience will find it very hard to compete for staff. Working evenings isn’t for everyone but once it becomes clear that you can get paid 25% more for the inconvenience it’ll be a very enticing prospect.
In summary to be at the front edge of this kind of wholesale change is a risky business, and that risk is carried to the largest extent by the restaurateur. The rewards would come from what should be a more settled workforce who are able to provide better service over a longer period, and perhaps in the ability to more easily recruit staff based on higher wages.
Guests would benefit from improved transparency and be safe in the knowledge that staff are being properly rewarded for their work. It also removes any trace of our particular British awkwardness about the situation.
The true cost of eating out would be come clearer because there are no ‘hidden charges’.
Guests may experience a price rise slightly in excess of the equivalent bill value they are used to paying as a result of the increased VAT but it would be relatively minor.
Some guests may feel the loss of the carrot/stick because they are no longer able to reward or punish their server for their perceived level of service. I’m not convinced this is much of a deal though.
Increasing wages through the use of price rises is ideal for those lovely people at HMRC because they will be able to collect 20% of that increased revenue whereas for tips given freely (not through the application of a service charge) VAT is not applicable.
From a statistics point of view a ‘Hospitality Included’ system would mean a very nice bump to average wage levels across the country – definitely one an ambitious minister would like to get behind!
So there we have it, one man’s take on the tipping situation and how moving to a ‘Hospitality Included’ model would impact the various stakeholders.
Great for the government who would see their VAT revenue increase.
Some tangible benefits to staff in the short-term including more stability but a risk that scheduled national living wage increases would be avoided over the next few years.
Relatively minor improvements for guests, more centred around peace of mind.
A whole lot of risk placed on the restaurateur but with some possible benefits that could help to improve customer experience and drive growth in the business.
Any thoughts I’m always keen to hear them – write below or hit me up on Twitter @TheCafeGuy.