Tip Credit Applied to Minimum Wage – Not as Evil as it Sounds

Michael Maxwell – Partner, Blue Orbit Restaurant Consulting

Tip Credit Applied to Minimum Wage - Not as Evil as it Sounds

Many people view tip credit as “just another way for the greedy restaurant owner to line their pockets with cash.” Servers often have the same opinion and feel like they are being taken advantage of.

Ultimately paying a good wage and eliminating tipping would create a much easier world for all restauranteurs. There would be no time-consuming bookkeeping to make sure tip credit is meeting minimum wage for each employee. No more chasing your staff around at the end of every shift to make sure they have declared their tips. And no more constant complaining from servers about poor tipping customers.

But for now the bottom line is the bottom line. Let’s do some math. If the average check at a local full service casual restaurant is $19, you are open 365 days per year and you serve 150 guests per day your annual sales would be $1,040,250. Lucky restaurant owner, right? No, not so much. The average profit margin for that business is about 7% or $72,817. Not too shabby, huh? Still not as good as it sounds. Remember that owner probably worked most of those 365 days. Out of that $72, 817 the owner needs to reinvest in building maintenance, marketing, technology upgrades, etc. and also pull a salary from the pot. Don’t forget he has to pay personal income tax on any money he pays to himself as a salary.

Now, let’s take the tip credit out of the equation and add that money back in as an expense. If you run an entire day with 6 servers working about 10 hours and pay them the $5.12 per hour that was previously covered by tip credit for 365 days, you now have to subtract $112,128 from that $72,817 profit. I think you can see that is not a very good business model.

Larger companies with better purchasing efficiencies can cover that tip credit loss in better cost of goods and supplies and restaurants in affluent areas where guests are willing to pay more can make up the difference by charging more. But the general mom and pop restaurant, which makes up a huge portion of restaurants in the US, can’t just raise prices and expect guests to keep coming. This may change in the future, but for now it is how restaurants survive.

Removing tipping from the equation also takes away the reasons that most servers enjoy working their job.  Currently, they can work much less than full time and still survive.  Their ability to make good money depends solely on their personality and salesmanship skills and not on the number of hours they work.  A good server can bring in tips that put them in the pay rate range of $40 to $60 per hour which is much better than what they would be making at an hourly wage paid by the owner.

So, no matter how much the entire tipping process gets portrayed as an evil practice, for now it really is a win for everyone.  Owners can afford to run their business, servers can make a decent living while having free time for family, fun or school and patrons still are charged reasonable prices.  Considering $2.13 an hour as something good is really just a perspective change for all parties involved.

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