The Tipping Point

One of our major issues in our service industry, in particular, restaurants, is the ubiquitous custom of service charge and additional tipping in its daily operation.  This custom has sparked several concerns from customers, management, employees and the government tax laws, however, it will perpetuate as long as there are no set rules identified for the service industry. Perhaps, the dilemma of the service charge and gratuity has become a topic of conversation more so within recent times, because of low discretionary income, increased cost of living, static wage policy, unclear restaurant policies and the realism of the gap in tax declarations.

Service charge and tipping are common in a multitude of service professions, such as baggage handlers, washroom attendants, housekeepers, hairdressers, bellmen, bartenders, porters, servers to name a few.

In the restaurant and hotel industry, service charge was conceptualized to offset costs for banquet staff based on minimum wages offered to the employees by the employer, normally ten percent (10%) mandatory charge of the list price levied to a customer’s billing.

Tips, on the other hand, is a voluntary gift of money offered to the server in appreciation of the delivery of service. Tipping was introduced before service charge was considered a mandatory payment.

Despite the slight nuance of service charge and tipping, both connote an expectation of patronage frequency to the establishment; better service delivery and an attraction of competent labour.

Service industries such as restaurants occupy a square footage of real estate with utility consumption and a comfortable environment similar to a retail store. Restaurants are obviously different from retail stores as it amalgamates amenities, ancillary items, food and beverage costs and service provided to meet the customer expectation. It is an industry that has high operational costs in inventory, equipment, theft, damages, spoilage and replacement costs.

Establishments profiting above breakeven would apply the traditional service charge tabulation to give their service team a commission. However, some establishments have taken a different approach based on its volume of sales and may choose to disburse service charge as bonuses, payment for extra support staff, uniforms, training, and for other employee benefits. This approach may be effective to keep the staff employed, weather shortfalls in the industry, and enable the establishment to maintain standards without comprising on the list price of the food cost to the customer.

Theoretically, service charge is calculated as a percentage on the list price (production cost, ingredients and profit) of an item, say chicken linguine listed on a menu at $87.50. The Service Charge (10%) would be $8.75 and the Value added tax (VAT) at 15% would be $14.44. A tip can be an additional of 10% paid at the end of the service. VAT according to the Ministry of Finance is applied to goods and services, hence it would be the total price of the list price and service charge.

Now, out of every $87.50 the restaurant list price, a percentage is deducted to pay for bank charges, salaries based on minimum wage, national insurance, health surcharge, cost of ingredients, wastage, spoilage, utility charges, licences, waste removal and other expenses.  Out of $8.75, management would calculate through a weighted system of job position of staff in food and beverage including support for conference and/or banquet to provide the employee benefit. It is believed that this mandatory tax would be beneficial for all parties, such that , tax is collected, the management has a fair policy, the employee gets a benefit and the customer should be satisfied with his/her dining experience.

Some restaurants and bars place tip notices on “table tents” or glass jars on the tables for customers to give gratuities. Recently, tips are included on bill receipts and card machines for the customer to pay additionally on top of the billed charged prior to completing the transaction with the server.

Tipping has a psychological relationship with the customer. Customers may feel compelled to give an additional tip because of the guilt or embarrassment; perceived unfairness by the establishment on its wage policy; exceptional service; service staff expectation; or the other extreme, where customers may choose to tip to impress friends/colleagues.

Who gets the service charge and the tip? Is it the server or the team of workers on shift? Briefly, tax auditors are lost in income declaration at the service level with the “tax free” tips which will raise other issues in terms of wage structures and labour laws; Employee conflicts will occur among service staff with tip entitlements ; Discrimination issues for tips can occur; The establishment will appear ruthlessly unfair to the employees with disutility of labour without policy; and , The customer will leave with subliminal queries for disbursing 1.4% more income, than he/she was originally prepared to pay.In actuality the customer is unaware of the pooling policy of tips and the standards within the industry.

From my perspective, T&T should adopt best practices to level the playing field and establish ethics within the industry. As for the tipping point controversy, let’s just say nothing happens unless there is cause for the change.