Starting January 1, 2014, restaurants are no longer able to count automatic gratuity as tips for servers. The new rule actually passed in June 2012 and was implemented January 1, 2013 but the IRS is not enforcing it until January 1, 2014 to give restaurants time to adjust and comply to the change. The IRS now classifies automatic gratuity as a service charge which is considered part of the server’s wages, not a tip. Service charges for restaurants are a previously agreed upon price to be charged for services provided.Restaurants keep this amount and it is not considered a tip for servers. A tip is classified as payment that is made free from compulsion and the customer has the right to determine the amount given and to whom the money goes. The IRS is classifying automatic gratuity as a service charge because customers are not given the choice as to how much they will pay, as it is tacked on at the end of the bill. Typically, restaurants have a disclaimer on their menus that will state something like “For parties of 6 or more, an 18% gratuity charge will be added to the bill.” Even though servers are given this as a tip, it is not given freely by the customer.
Customers tend to be frustrated with automatic gratuity charges anyway. Many feel that it gives the waiters an excuse to not give them good service since they are getting a tip anyway. Granted, this isn’t fair to the servers since automatic gratuity is included with large parties and handling a large party is a challenge in and of itself. It takes considerable effort to get everyone’s food and drinks out at the same time. Since restaurants know that the new rule will soon be enforced, many have begun to add suggested tips onto the bill, rather than automatic ones. Typically, the customers are shown three options with a low tip price, a medium, and a high tip for excellent service. Usually this ranges between 15% 18% and 20% with the tip already figured out for the customer, all they have to do is write it in the blank line and add up the total. It’s been found that customers tend to tip higher when given these suggestions (maybe because they don’t have to put effort into determining 20% of a $63.78 meal).
Tipping, while explicitly optional for customers, isn’t really optional for servers—it’s how they get paid. Waiters are legally paid below minimum wage (as low as $2.00 an hour when minimum wage is $7.25 as of October 2013) because they are expected to make up the revenue in tips. Most people tend to understand this because they probably know someone who is a waitress or may have even been a waiter themselves. Studies have shown that people tend to tip because it is the social norm in the United States (tipping is a very different matter in many other countries). The next two reasons people tip are to show gratitude to the server, and because the customer knows the waiter depends on tips to be able to make a living wage. Waiters know that giving customers better service will typically result in a bigger tip because people tip to show gratitude, even if they aren’t expecting to visit that restaurant again. The same study surveyed that 60% of people would prefer to tip a waitress than have to pay a service charge.
Now that automatic gratuity will be counted as a service charge, restaurants will have to decide whether or not to keep them for large parties. Many are choosing to drop automatic tips all together, while some are wanting to use them sparingly. It’s understandable that they would want to keep them for parties of 20 or more where getting everyone to tip fairly would be an issue. After all, the server still relies on tips to meet minimum wage and working that large of a party takes a great deal of time and effort. A restaurant keeps the money made from service charges, but they can choose to give a portion of it to the waiter, but the waiter won’t get that money until payday, when they are used to receiving it at the end of their shift.
If you are the owner of a restaurant, what changes are you going to making, if any? Or, if you are a waiter or waitress, what do you think? And since everyone is a customer, what are you willing to do to make sure your server gets properly tipped?
