January 31

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No-Tip Bars: What’s Working and What’s Not…

Written by Jennifer Billock

A woman inputting tip totals into a computer.

Tired of calculating your earnings at the end of the night? There’s a new wave of thoughts on the great tipping debate that might change the way bartenders make money. (Photo: Kanawa_Studio/iStock)

About a year and a half ago, William Oliver’s Publick House in Colorado switched to a no-tip model. And, as of January 1, they doubled back, ditching the no-tip policy for a combination model of slightly lower wages buffeted by gratuities. But it’s not because the no-tip wages were too high to manage, owner Ryan Wallace said. Rather, the change back is due to restrictive tax laws making it impossible for the business to function unless tipping is reinstated.

When the company switched to no tipping, increased workers comp insurance premiums and payroll taxes alone cost William Oliver’s an extra $25,000 per year. Minimum wage increases going into effect across the country, forfeited tax credits and a new amendment to Colorado laws will make any more changes in cost unsustainable for the business.

“There’s a federal tax credit, designed to encourage businesses to have their employees report tips accurately, that you lose if you don’t have tipped employees,” Wallace says. “The way I look at that is it’s a federal tax credit that’s incentivizing paying lower wages because it incentivizes tips. With Colorado Amendment 70 that went into effect January 1, minimum wage is going up 44 percent by 2020. That’s about a dollar every year. If we were to give that $1 cost-of-living increase every year to our staff, there’s no way we could afford the other tax increases.”

Joe’s Crab Shack, which announced a move to no tipping in 2015, recently scaled back that program largely due to the same reasons William Oliver’s faces. Income in the chain had dropped year over year by 16.2 percent in the first quarter. Bob Merritt, the CEO of Joe’s parent company Ignite Restaurant Group, cited the drop as partially caused by the increase in labor expenses after quitting tips, which required a menu price increase to cover the extra costs. The no-tip model was in a testing phase at 18 Joe’s restaurants, and it took less than a year for 14 of those locations to go back to a tip model — after eight to 10 percent of customers stopped coming.

But is the model failing overall, or does it actually work? It depends on who you ask. Patrick Connolly, the owner and chef of Brooklyn’s Rider, opened his business on a no-tip foundation. As a result, prices are higher than average — but customers don’t seem to mind.

“We decided it was the best decision to open up that way rather than start the traditional way of tipping for six months and then change course,” he told CNBC. “Nobody really likes change, especially when you’re dealing with their money. People have been very receptive to it.”

Park Kitchen in Portland, Oregon, also increased menu prices to accommodate a no-tip policy. Owner Scott Dolich was concerned with new legislation that no longer allows restaurants to require tip pooling (sharing tips with the back-of-house employees), leading to a major difference between income for both front and back-of-house employees. So he came up with a new model, called One House, to maintain the no-tip strategy. Now, everyone is cross-trained to do every job. The servers sometimes cook and the cooks sometimes serve, but everyone makes $15 an hour, with no tips. Since implementing the model, Dolich says the restaurant has become more efficient — and the staff makes about the same as they would at a tipping establishment.

Jennifer Bennett Piallat, owner of Zazie in San Francisco, noted another benefit of the switch to no-tip: “a lot less judgment, a lot less paranoia, angst and anger” coming out of the staff, she told The Guardian. She says racism and discrimination among the staff has also decreased significantly. “Everyone thinks that the servers are being judged, but the servers are judging just as much, or if not worse.”

Restaurant owners across the country tend to agree the shift to no tips is a good move, a recent study from American Express found. Eighteen percent of the 503 restaurants surveyed have already done away with tipping, and another 29 percent are looking toward adopting the policy in the near future — though 27 percent said they would not make the switch.

But whether no-tip models stay or go, Wallace says in every case, the government really needs to step back and look at the industry as a whole.

“I still have hope that we can return to a no-tipping model,” he says. “But the government needs to stop looking at just the wage and look at the overall impact of specific industries. If the industry really wants to move to no tipping, we have to get the government involved in the right way to change how the rules are written.”