walkitout (walkitout) wrote,

Tipping, Tax Evasion and Other incentives

Recently, Pete Wells in the NYT described how some Very Expensive Restaurants in NYC were going tip-free.


This provided an opportunity to generally discuss -- and not in a positive sort of advocacy sort of way, but quite the opposite -- the practice of tipping.

Wells thinks tipping exists for these reasons:

"Americans have stuck with tipping for years because all parties thought it worked in their favor. Servers, especially in restaurants from the mid- to high-priced, made good money, much of it in cash, and much of that unreported on tax returns. Owners saved on labor costs and taxes. And customers generally believed that tips brought better service.

The self-interest calculation may be different now. Credit card receipts and tougher oversight have virtually killed off unreported tips."

He also discusses some front-of-the-house/back-of-the-house wage differentials that have been expanding, and litigation against very expensive restaurants and restaurant chains for violating labor laws that govern what can be done with tipping.

Slate ran an indictment of tipping as well.


Unfortunately, the author appears to be operating under a very odd belief about employment in the United States:

"Virtually every other employee in America knows how much they’ll be paid up front, and somehow the man who sells me shoes and the woman who does my dry cleaning still manage to provide adequate service."

While I can find no evidence that anyone tips their dry cleaners (I'm sure _someone_ does, but there's no general practice), shoe salesmen make part of their money in commission, and there are decades of stories about particularly successful shoe salesmen at Nordstrom's who manage to make $100K+/year as a result -- that's not their _base pay_ by any stretch of the imagination.

So Wells thinks it is all about tax evasion, but acknowledges that when a restauranteur switched from a tip system to a service charge, customers complained. Palmer thinks there's no effective incentive from tipping, but he also thinks shoe salesmen get a straight salary, so there's no reason to believe he knows what he's talking about.

Tipping is clearly serving a whole bunch of purposes, however, there's some reason to believe that servers in general are a little confused about how the law applies to them. If you go digging around in forums where servers are discussing tip practices, quite a few of them are extremely pissed off about things like FICA and similar in their paycheck wiping out all of their base pay, even tho just counting the charge slip tips, their income was such that was sort of inevitable (that is, even if you assume they had $0 cash tips, their base pay was going to get wiped out anyway). Among the more informed, there remains the idea that the law only requires that you claim tips up to 8% of your gross receipts, or perhaps 15% and after that you can keep the rest untaxed. About the most informed recognize that you are supposed to declare all of your tips, but even they believe that this is the result of a change in the written law -- they don't seem to understand that this is just what happened after someone wrangled with the IRS all the way up to the Supreme Court and lost.

Starbucks has been subject to numerous lawsuits about just who can and cannot share in their tip jars. As my friend R. pointed out, there isn't any obvious way to tip using a credit card (no line on the slip) nor is there an option when using a payment card or the mobile app (please let me know if I just missed this). We were wondering why, until I stumbled across California, New York and Massachusetts lawsuits about who can and cannot share in the cash tip pool: assistant managers are out, but different courts have gone different ways about whether shift supervisors can be included.

If _I_ were Starbucks, I wouldn't put a line on the credit slip, either, and I'd be trying to figure out what would happen if I banned the tip jar and started firing people who put one out when no one was paying attention. There are plenty of Dunkin' Donuts, Panera Bread, and fast food places which either don't have any receptacle, or which have put out a penny bin for a charity, rather than have a tip jar.

There are a ton of problems associated with attempting to go tip-free. For one, you lose the tip credit (unless you're in a state that already banned it). For another, you may have pay your servers more than minimum wage -- maybe a lot more, like $20-$40/hour -- in order to compete with the places that still have tipping. If you attempt to address this by putting a "service charge" on the slip that isn't a gratuity, that is, non-optional, you'll run up against customer kickback. If you raise prices to cover it, you might become non-competitive. And some customers are going to _really want to tip_, and dealing with that situation (servers who accept the tip, customers who get mad when turned down, etc.) is not going to be easy.

There is no reason to believe that transitioning away from paper and metal money to payment cards and other forms of money will put an end to tipping, altho of course you can always program the apps and POS to make it harder to tip (see: Starbucks). However, the partial transition may be part of why we've massively escalated the tip expected with a meal over the last few years, creating a probably untenable tension between front- and back- of the house and _definitely_ creating a juicy pool of money for people to litigate over. People who pay on a card tend to tip more heavily than those who pay with cash.

Despite the apparent escalation, however, servers still mysteriously tend to prefer cash. I'm sure Wells is right that some of it is straight up tax evasion. But when servers describe their compensation, it's really weird, at least in states that still have tip-credit: they'll say base pay in dollars, approximate number of hours worked per week, amount of tips earned in a shift, but not the number of shifts OR what the tips work out to per hour. Servers who are claiming all their tips into the POS (even if they never take the cash out of their pocket, except to distribute to bussers and so forth) seem to actually know their real hourly, but the ones who don't claim DO NOT seem to know, and, further, seem to be really freaked out about the 3% they lose on credit card tips (which some seem to believe isn't 3 cents on each dollar of tip, but rather 3 cents on the gross receipt -- can these people do math?), especially since when they tip out to bussers and so forth, they feel like they can't pass that processing fee along.

A lot of servers think of serving as Not a real job -- and that's in a positive way. Like, having a real job is a step down, makes you a mark, and that's not an uncommon perspective among people in sales who are doing well. If you are tipping heavily because you feel sorry for your server, working so hard, so vastly underpaid, You are a Mark. Perhaps the best argument for re-thinking tipping is to separate that gloating-ha-I've-got-it-so-good from the tax evasion. If a sales critter thinks they are so brilliant because they talked me into buying something, I'm basically OK with that. But if the sales critter thinks they are so brilliant because they gave themselves a 10-30% raise by not paying their FICA, state and federal income tax, I feel Real Different About That.

When I started looking at this hard, I thought briefly that tipping was going away. But once I hit the shoe salesmen remark in the Slate article, I changed my mind. It'll be here, probably for a long while. But it's going to evolve.

ETA: Some servers really like cash because they get it right away. Some servers get even their credit card tips right away and like that. Some servers get their credit card tips on their regular paycheck, usually every couple weeks. There are some interesting aspects to frequency with which one gets paid, and the impact that has on the employee's budgeting practices (pro and con), but I'm treating that as out of scope.

ETAYA: Also a bit more about tipping and labor law, courtesy my husband:


Does sort of make you wonder how this might spiral out to include all the weird fees and rules involved in renting a chair at a hair salon.
Tags: our future economy today
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