Blue Orbit Hospitality Consulting

Restaurant Surcharges – Health Insurance vs. Tips

Ray Camillo – Founder & CEO, Blue Orbit Restaurant Consulting

A few weeks ago, my wife and I ate San Francisco. A recurring line item on our checks was “EE Benefits Surcharge” or “SF Mandates” charge. My first reaction was, “hey… why do I have to pay for employee benefits…isn’t that the restaurant’s problem?” It got me thinking about the whole idea of cherry-picking line item costs on a Restaurant’s Profit and Loss statement and presenting them to patrons as something they should pay for on top of the price for their meal. For restaurants, the two add-on, employee related charges that are showing up on guest checks in different markets are:

  • Tips  (i.e. – outlawing tipping and folding a living wage into menu item pricing) and
  • Health Insurance (i.e. – adding a line that covers – or assists the restaurateur in covering – the cost of health insurance).

As restaurants try to find new ways to stay competitive, I fear these kinds of add-on charge strategies will keep cropping up. Whenever I ask a non-restaurant person their opinion on folding tips into wages and just charging more for the food, the reactions are remarkably quick but fall into one of two camps: “Just fold it in, I’ll pay it…I’d love to not have to deal with tipping” or “No way! I’ll decide how much to tip and if the service stinks I won’t pay as much”. The ideology probably runs along party lines – tax-and-spend vs. trickle down.

I am similarly quick with my response…until I think through it. After a lot of thought, I finally have a stance…and like all good legislation, it is moderate. When I buy a cart (or “buggy” as we say in the South) of groceries at the grocery store, I don’t see a line item expense for employee health insurance – disguised or overt. I assume the business will charge me an appropriate price for my apples or Bounty paper towels to cover their costs – labor included. As incentive to keep me shopping there, the grocery store must adopt wage ranges, man power planning, operating systems and a management structure that controls costs so that their banana prices remain competitive, lest they lose me to a competitor charging $.15 less per pound. Sometimes the business may accept lower profitability by eating costs to give guests the best deal possible (as a means to maintain popularity). Sometimes they sell common items at a highly competitive price only to gouge customers on prices that are not so recognizable once they go into the store. Convenience stores are well aware that customers will do a U-turn to save $.01 on a gallon of gas and won’t notice to the fact that the donuts and coffee are $.50 more. The rest of the time (if not most of the time), the business attempts to maintain higher profits by delivering the highest quality possible while paying as little as possible for the labor and the ingredients. This is normal and works for retail stores and manufacturing plants. Production or retail selling ingenuity is rewarded.

But the hospitality industry is not the same as they share components with retail and manufacturing. Restaurants, by nature, are generally experiential where the commodity sold is as much service as it is the meal itself. This has created a culture of tipping so successfully that it is supported by states legislation through a tip credit against minimum wage – the practice of anticipating tips as enough of a legitimate expectation, that, so long as restaurants track them and ensure the base wage + tips ≥ minimum wage (and adjust the employee’s pay if it isn), everybody’s happy.

A lot has been made of Danny Meyer’s 2015 foray into eliminating tipping in his Union Square Hospitality Group restaurants (Grammercy Tavern, Manhatta, Porchlight, Blue Smoke, etc.). It was a big deal and caused a stir among employers, employees and customers alike. Tipped employees were skittish about forgoing tips in favor of a set wage. Employers were worried that customers would freak out over the increased prices on the menu and defect to lower priced restaurants for a similar experience while failing to do the math showing they’re paying the same price after tip. Customers were worried because they feared that, without the inherent service q