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In the US these days, everyone has their hand out.
Defenders say gratuities inspire good service from waiters, parking valets and manicurists. Others call it a form of extortion. Either way, they cloak an employment system that is nearly unique. In the US, customers, rather than bosses, determine whether service workers make a decent living.
Nowhere is this more true than in full-service restaurants, which pay their wait staff as little as $2.13 per hour and rely on tips to make up the difference to the legal minimum for other jobs.
Restaurant industry groups say this allows eateries to hire more waiters and keep menu prices down, because tips cover a portion of labour costs. For decades, customers told pollsters they liked the discretionary aspect and believed it led to better service.
But the lingering impact of the Covid pandemic is now straining the bonds between businesses and their customers, and putting tipping under pressure. This could have profound consequences for the US economy.
Many experienced waiters who lost their jobs in the 2020 shutdowns opted to switch to jobs with more secure wages, leading to staff shortages and service woes when businesses reopened. But customers were initially so grateful to front-line workers that they tipped generously, allowing take home pay to rise.
However, the concurrent rise of electronic payments coupled with high inflation eroded much of the goodwill. Rather than relying on tip jars and voluntary handouts, fast-food chains, nail salons and other service businesses added explicit gratuity requests to their checkout process.
Restaurants got into the game with a vengeance. I’ve seen tip screens that recommend as much as 25 per cent, double the 12 per cent service charge that some UK restaurants levy, and shocking compared to the pocket change expected in much of Europe.
A growing number of Americans are suffering from tip fatigue. As many as three in four tell surveys they think tipping is out of control, and 37 per cent say employers should pay more rather than relying on tips. Gratuities to non-restaurant workers started to fall late last year, and there are fears the pullback could spread, sharply crimping the real pay of more than 4mn American workers in “tipped occupations”.
The situation has now become a political issue. US presidential candidates Donald Trump and Kamala Harris have each promised to make tips tax exempt for hospitality and service workers.
Cynics say they are wooing voters in Nevada, where 27 per cent of jobs are in leisure and hospitality. And Senator Ted Cruz of Texas has put forward a “no tax on tips” bill that he says would apply to waiters, bartenders and beauty professionals, among others. Restaurant groups support the bill, saying it would get more money to staff without raising customer costs.
If customers are tired of tip demands now, imagine what tax breaks would do. Hedge fund managers might seek “voluntary” tips in lieu of performance fees. Or Wall Street bankers could try to take advantage of the Starbucks outlets located inside their headquarters to become the first billion dollar baristas.
Harris’s camp insists that she would impose income limits to prevent such abuses. Trump has not given specifics.
Some labour advocates argue that there are better ways to help vulnerable tipped workers: one-third of them already make so little that they pay no income tax at all. They point out that the two-tier system was born out of exploitation. After the Civil War, restaurant owners facing demands for higher wages from white workers instead hired newly freed slaves to work for gratuities alone.
Groups such as One Fair Wage want to force all employers to build the minimum wage into their budgets, rather than encouraging more to rely on tipping. Seven states already do so. “We need to close this loophole,” says co-founder Saru Jayaraman.
Experience suggests there would be growing pains. When Danny Meyer, founder of New York’s Union Square Cafe and Gramercy Tavern, tried in 2015 to eliminate tipping in favour of prices that included a consistent hourly wage, diners pushed back.
“Most patrons couldn’t do the math,” says Meyer. He threw in the towel in 2020, but still hates the practice. “It’s basically saying to consumers that the price you see is not the price you get. It’s bait and switch.”
And when Washington DC started raising its tipped minimum wage last year, many restaurants added mandatory service charges and some shifted to ordering at the bar. Industry groups also blame the tax for a drop in full service waiter jobs. “It’s changed the dining experience,” says the National Restaurant Association’s Mike Whatley.
Higher menu prices that cover more of the wage bill would initially be tough for both restaurateurs and diners to swallow. But they would help restore customer trust. And improving recruiting and retention for a sector that still has an elevated level of job openings will do more to improve service quality than ever higher automated tip demands.
If demands for tips keep growing, more customers will balk, leaving workers short-handed and restauranteurs on the hook to top them up to minimum wage. Gratuities aren’t voluntary if the economy would collapse without them.
Follow Brooke Masters with myFT
