Last Update
Aug 17th, 2015

Tips, Tip-Outs and the Forced Gratuity

We've all seen the notation on the bottom of the menu; the curious line that can spark intense debate between service employees and those of us who work in the real world of fixed wages:

18% Service Charge Added for Parties of 6 or more

It's lunacy to those of us who dine rather than serve; We're going to drop $600 in a restaurant so they're treating us like pariahs who are unlikely to leave a fair tip? Such things aren't worth too much stress, as most people don't dine in large parties very often. Of course when you discuss tips with a server working for tips; their opinion is highly biased. Inconvenient facts like serving an $80 bottle of wine takes no more effort than a $30 bottle and that they don't pay taxes on their full earnings have no impact on their opinion that they should get 25% or more regardless of the circumstances.

Recent IRS rulings have muddied the waters on mandatory service charge and how they relate to minimum wage laws and FICA credits. First some opinions on mandatory gratuities.

The Double Tip

Personally, I don't mind the mandatory tip, because it usually saves me some money. My personal policy is that if there's a mandatory tip, that's all I leave. I don't leave less if the service sucks, and I don't leave more if it's great. And I usually leave more than 18%, so for the rare time that I get a fire-breathing moron server that deserves less, I make out in the long run. The big issue with mandatory tips is the Double Tip; which in many cases is the entire point for places that charge it.

If you wonder why many places with mandatory tips are in tourist areas, it's not because tourists are bad tippers. Unfamiliarity is the issue, and when you go out and have a few beers when you're on vacation, you generally don't scrutinize the check that carefully. You don't notice that the tip was added, so you add another 20%. Bam, you've just left a 38% tip

Mandatory Tips remove Incentive

The big issue to me about mandatory tips is that servers have less incentive to provide good service. If you've ever been to a Caribbean resort, where tips are generally added to everything you buy, service is a joke. They couldn't care less how long you've been waiting for a drink. They get their 18% just for showing up.

Of course most servers today expect at least 15% just for showing up at work; there seems to be a disconnect between the service aspect of the job and the tip. Servers have come to "expect" that if their sales total $600 then they'll make $100-$120, whether they bust their butt or not.

Mandatory Tips in Fort Lauderdale

I'll guess that most large restaurants in Fort Lauderdale charge a mandatory gratuity for "large" parties of 6 or 8 or more. It's become as standard as not giving you a salad or baked potato with your meal. There are a handful of restaurants that charge a mandatory gratuity to everyone in town; 2 of which seem to do so for the wrong reasons and are very anti-consumer. Stephane's in Boca used to add a gratuity charge for parties of 4 or more, which is one reason that they're out of business.

Sage French Cafe

Sage is the ultimate in bad restaurant behavior. They advertise a "2 for 1 lunch", but then they charge you tax and a forced gratuity on the amount before they remove the "2 for 1" items. You end up paying 10% tax and a 40% tip, negating most of the savings on the entrees. Under Florida Tax Law (GT-800035), this practice is unlawful:

Meals that are two for the price of one are not complimentary food items. You must calculate the tax on the sales price charged for both as two for one. There is no use tax applied since the two for one charge is a discount or reduced charge covering both meals.

If they're not reporting the full sales tax collected (ie if they only remit 6% of actual sales), it's a crime. The owner of The Venue in Clearwater was recently sentenced to 30 years in jail for not remitting all of their sales tax.

Needless to say, I'll never dine in Sage again.

Coconuts

Coconuts, for some reason, charges an 18% "gratuity". To their credit, they do stamp the bill to warn you that a gratuity has been added, so they're not trying to fool you into double tipping. Most people in this town are good tippers, so it seems counterproductive. It's probably costing the servers money. I would have left a $4 tip on this check normally.

Oasis Cafe

The Oasis Cafe adds a 16% gratuity to the bill.

Blue Moon Fish Company

Blue Moon is the ultimate adopter of bad restaurant tricks; they seem to copy the bad behavior of other restaurants on a regular basis. They're well known for their 2 for 1 lunches and Sunday Brunch; recently they've started charging an 18% gratuity on the bill "before discount", which means you're paying a 35% tip for lunch. Another ridiculous policy is that you can't get the 2 for 1 deal if you're in a party of 10! Really? So if I come with a large party we have to get 2 separate tables? Who is going to pay twice as much because they're in a large group? Based on this policy, if you have a large group for lunch, go somewhere else.

Why Forced Gratuities May Be Coming to an End

Now for the big thing. Based on a new IRS rule, automatic tips will no longer be considered to be tips, but they'll be considered to be a service charge. While this may not seem like a big deal to the casual diner, it creates a logistical nightmare for restaurant owners and operators.

The rule determines that mandatory tips are actually service charges, which means that they have to be reported as income, and that distributions of the service charges to servers will be wages and not tips.

What is a Tip?

The legal definition of a tip, as least as it applies to federal tax law, is "a voluntary additional payment made for services rendered". The tip must go to the people who actually perform the services; the "house" cannot keep any of it for themselves. Since a gratuity added to a bill is not voluntary; it is not a tip. The IRS does not buy the argument that customers are free to leave less.

Credit Card Fee Deductions

In Florida, it is legal to deduct only the actual service charge that is charged for the sale from a server's tips. So if a restaurant pays a 2.9% service charge fee on CC charges, they can deduct that amount. They are not allowed to deduct more than the amount they actually pay on that charge. The cannot include administrative charges, or claim that it costs the restaurant 4% to accept CCs overall.

Tip Credits

Restaurants are allowed to pay employees under the minimum wage ($2.13) as long as they receive tips that bring their pay to at least the minimum wage of $7.25. The rub is that service charges won't be considered tips, so restaurants will not be able to use mandatory tips to offset pay under the minimum wages. Restaurants with mandatory tips on all sales will have to pay employees the full minimum wage.

Something else that most servers don't know is that restaurants get a credit on the FICA contributions on tips that bring an employee's pay over the minimum wage. This credit can't be taken for service charges. Any monies received from service charges are considered wages. So if restaurants return the full service charge to employees, they will lose money on the loss of the credit.

Tipping Out

Tip pools are generally legal, but only employees who customarily receive tips may be included in the pool. "The House" cannot be part of the tip pool under any circumstances, and Florida case law has determined that managers may also not be included, even if they assist customers as part of their duties. Cooks, chefs and dishwashers are also not allowed to be included in tip pools.

The law requires that if a tip pool includes employees that are not customarily tipped, then the employee must be paid the full minimum wage of $7.25 and they are owed all tips contributed to the pool (ie the pool is illegal) and the amounts paid into the pool must be returned to the employee).

The Large Group Mandatory Tip Paperwork Problem

Once the new rule goes into effect, it becomes more complicated when only "some" of a server's tables have mandatory tips. Tips from their "banquet" tables (ie large groups that are charged a mandatory tip) cannot be pooled with tips a server gets from other tables. Distributions from service charges won't count as tips against the minimum wage requirement, so accounting becomes difficult. Service charge distributions are wages; creating accounting difficulties. If restaurants just throw those charges into tip pools, then they risk tax scrutiny.

The large group tip issue is such a large issue that many large chains are considering doing away with the process. It just opens a business up to legal problems as the murkiness of the accounting can be challenged

Changing Policies

In January, the new IRS rule requires that all "Mandatory Gratuities" be categorized as "Service Charges". Many large chains are now considering dropping the practice; Darden in particular has a trial going that is testing a new policy of "suggested tip", which many restaurant POS systems now print on the bill.

Large restaurant chains have long considered themselves too powerful to have their policies challenged, but several recent lawsuits have caused them to change their thinking. Mario Batali's restaurant group recently settled a 5.25M suit which alleged that they were deducting 4-5% of wine sales from the tip pool.

Texas De Brazil has 2 lawsuits pending; one case involves servers being required to pay for their uniforms which brought their wages under the minimum wage. Such requirements cannot cause an employee to retain less than the minimum wage. Another suit alleges that the tip pool laws were violated because they have to tip out the Carver and the Carver Captain.

While restaurants come up with new ways to squeeze their customers by the way of smaller portions and higher prices; it's becoming more difficult for them to take advantage of their employees. There are a couple of restaurants that have eliminated tipping and just have priced their menus to include service; so that the price of your meal includes the server's wages.

My personal opinion is that tipping has become an entitlement and that it's gotten a bit out of control. Few servers deserve more than 20%, and at expensive restaurants, most deserve less. I eat out every day and I rarely encounter an enthusiastic server or even one that is doing more than going through the motions. Fort Lauderdale has long been known for lousy service, particularly at the beach. Tipping more doesn't change things unless you're a regular.

So maybe it's time to just pay servers a fair wage and getting rid of the practice. If you can't leave less than 15% for bad service without having an angry mob follow you out to the parking lot, then it's not really voluntary and it's not really a tip. It's just part of the cost of going to a restaurant.

Comment Policy Add Comment
alex
Reply
if the bartender make you 2 drinks, and you pay only one, why he shouldn't have the tips on both he make for you? and paying tax on both its an obligation cause you use alcohol on both, and the company has to pay the tax even 1 is "free"
Administrator
Reply
What grade are you in, Alex? Nobody this clueless can operate as an adult.
Administrator
Reply
For the Record, Blue Moon no longer has the 2 for 1 lunch, and I've heard that Sage isn't charging Tax on the full amount any more. They do still charge the gratuity on the pre-discount total.
Pete
Reply
I'm all for any policy that puts the decision back in the customer's hands. It's been more than ten years since I've been to Ft. Lauderdale, so I can't speak for what's happening today, but at that time, the majority of restaurants in tourist areas levied gratuity regardless of party size.

The result, as stated in the article, and as one would expect, was that none of the servers gave two shakes about the customer's experience. We routinely waited 90 minutes for food in nearly empty restaurants. We received no beverage refills for half an hour at a time while the waiter/waitress sat and chatted with the rest of the staff. I've never experienced anything like it anywhere in the world, and I've been a few places. You're not doing me a favor by bringing me my food, kids. It's your job, and if you ever want a better job, you'd better learn to suck it up and deliver service with a smile.
Jake
Reply
If I understand this correctly, servers at Coconuts and Blue Moon have to be paid the full minimum wage in 2014?
Jackie
Reply
I'd be curious as to whether they are paying servers full minimum wage. I've run into so many servers who get wage abused and they never report it. It so easy to do. And there's no defense for it.
Administrator
Reply
If they still include a mandatory tip on the bill, yes, that is correct.

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