Stories of restaurants transitioning to a no-tip policy have been slowly infiltrating the news for the past year. This change has been brought on for a variety of reasons: Minimum wage increases, simplified business reporting and employee satisfaction, to name just a few of the reasons for this transition.
A hot topic across all industries — especially the restaurant industry — is employees earning a livable wage. Several cities and states have taken it upon themselves to raise minimum wages from the federal mandate of $7.25 an hour for non-tipped employees and $2.13 an hour for tipped employees. For example, the City of Chicago recently mandated a minimum wage of $10.00 an hour for non-tipped employees and $5.45 an hour for tipped employees.
Some restaurants are transitioning to a no-tip platform to help respond to employee complaints regarding poor salaries. A no-tip platform provides a consistent paycheck for employees each week. In conjunction, many restaurants are implementing sales-based incentives and team goals for employees to ensure that service remains up to par. Employer benefits include simplified business reporting and tax compliance.
Transitioning to a no-tipping policy will likely require an increase in menu prices or a flat-rate service charge to recoup the lost tip income from customers. One thing to keep in mind if you are considering transitioning to a no-tip model is the IRS has ruled that automatic gratuities and service charges are distributed to employees as wages, not tips. This is an important distinction for tax reporting purposes, as it would exclude restaurants from claiming the FICA tip credit. On a side note, the Obama administration's FY 2016 Revenue Proposal would repeal the FICA tip credit as proponents of the repeal suggest the cost of the tip credit outweighs the positives of tax compliance.
There are many options to weigh when deciding if a no-tip model is suitable for your restaurant, employees and customers. An employer thinking of implementing a no-tip policy should discuss the possible change with your employees and advisors to verify it makes both social and economic sense. As the landscape changes, as a customer, be aware that your next meal out may include a service charge rather than a tip line on your check.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
