The Issues Surrounding Tipping

Published Date: 02 Nov 2017

My purpose in writing this paper is to outline and identify issues surrounding tipping, and summarize what we know about these issues as well as to synthesize and present the findings from my research. However, before I present these issues, I will present the origin of tipping. A "tip", also known as "gratuity", is a sum of money that is left for your server, willingly given in addition to the bill. According to the Oxford English Dictionary, "tip" is defined as the bestowing of "a small present of money upon an inferior, especially upon a servant or employee of another, nominally in return for services rendered or in order to obtain an extra service." From Wikipedia, the free encyclopedia, "A tip (also called a gratuity) is a sum of money tendered to certain service sector workers for a service performed or anticipated. Such payments and their size are a matter of social custom. Tipping varies among cultures and by service industry."

Origin of Tipping

It is difficult to determine when exactly tipping truly originated, but according to the economist Ofer H. Azar, tipping may have begun in Ancient Rome. Azar believes that it wasn’t truly practiced until medieval times in Britain. During the middle ages, nobles would travel between towns and would give money to beggars to ensure their safety while in town.

It was stated that tipping also appeared in 18th-century coffeehouses and bars (or pubs) in England. Signs reading "to insure promptitude", or T. I. P. for short, showed up on conspicuously placed jars to urge patrons to tip "in order to encourage better service", according to Sharon L. Fullen. Fullen has written about tipping customs in "The Complete Guide to Tips & Gratuities." The notion of placing containers to suggest that customers leave tips, in order to ensure better service is still practiced in today’s modern establishments. Some of the establishments include: Starbucks, Cold Stone, and convenience stores.

Even with its historical prominence, giving gratuities didn't appear in the United States of America’s lifestyle until the late nineteenth century. In these times, prosperous Americans began to travel to Europe in significant numbers, and upon their return, the idea of tipping came with them. In a very American way, it was used as a status symbol; to display affluence, and demonstrate the ability to throw their wealth around.

At the beginning of the twentieth century, the practice of tipping had become customary, however not without some objections. The Anti-Tipping Society of America had 100, 000 members that signed a pledge not to tip anyone for a year in 1904. During this time Washington State became the first state to make the practice illegal. In six other states, legislators from Wisconsin, Illinois, Iowa, Nebraska, Tennessee and South Carolina followed suit. Employers objected to the bans, because tipping allowed them to lower workers' wages. Workers also opposed the bans which they viewed as stifling their income potential. Their united opposition resulted in those states overturning their bans on tipping. By 1926 every anti-tipping law had been appealed.

Those opposing the act of tipping had many relevant points. They saw that tipping was an issue in a free market economy. They also understood that economics alone could not explain why customers were willing to tip. An effective and reliable wait-staff needs to cultivate a relationship with the guests, and they rely upon the guest’s goodwill. This point is what would eventually make tipping a powerful social norm.

How did America become a nation of tippers?

This is a great question to ask. The answer is because to this day it is a social norm to tip. Those who make the decision not to tip are normally shunned and generally thought of as cheap by their peers. Equally, forty-four percent of the United States of America respondents to a 2004 internet survey would prefer to have servers paid higher wages instead of tips, but only eleven percent of those same respondents disliked tipping. Given that consumers’ preferences appear to be weak and are unlikely to have strong effects on patronage behavior, they shouldn’t dictate tipping policies. Some of us in the United States agree to tip restaurant servers fifteen to twenty percent of the bill. Research suggests that bill size predicts dollar tip amounts better when the tipper is a regular patron of the restaurant.

Typical Customer Questions Regarding Tipping

1). Should you tip on the tax? After doing research it was suggested that there is no reason to leave a tip for the tax. However servers believe that they are not receiving their fair share when customers don’t pay a tip on the tax. The total amount of gratuities for the day determine how much tip the bus boys, runners and other staff members will receive out of the server tips.

2). What is the correct amount to tip on drinks? Bartenders receive tips from other members of the staff. So, if a patron wants to still tip it would be fair to give one dollar on each beverage. However, in some cases, the drink can cost twenty dollars. In this situation, the tip should be fifteen or twenty percent of the total cost of the drink.

3). Should a server be able to automatically include a gratuity if it’s not a large group? It is not a policy for a server to legally be able to automatically include a gratuity for their patrons that are not in a large group. A server should not automatically include a gratuity to anyone, at their discretion, because it can allow them to discriminate against some of the customers. If management decides to automatically include a gratuity from every customer, they must explain the policy and apply this to everyone.

4). Should a gratuity always be included for large groups? Absolutely, since it requires more work for a server to handle a large group. It is easier for multiple people splitting a check to make a mistake and miscalculate the tip. It is more convenient for a large party to have the tip already included. The server can lose money by giving most of their time and attention to large groups if no tip is given.

5). When, if ever, is it acceptable to leave a bad tip? Some believe it is your right as a customer that if you receive bad service and leave a negligible tip it will send a message of displeasure to the restaurant. I believe even if your server really, really messes up, you should still render a tip because that money is being distributed to multiple employees of the restaurant. If you're unhappy with your server it's not fair to penalize the busboy, bartender, food runners and other employees who depend on this money to make their living. As a customer you can speak to the manager and let them know that the service was poor. But, you are still leaving a tip.

Through research I discovered six major issues in tipping: consumer preference, price discrimination, server incentives, pay levels, income tax evasion, and employment discrimination.

Consumer Preferences

On an average day, approximately ten percent of the U.S. population eats at sit-down restaurants. In an average month, approximately 58% do so. Tipping policies are a feature of service products, which may be viewed favorably or unfavorably by consumers. Many argue that tipping provides the tipper direct psychological benefits, such as a reduction in their anxieties about being the target of the tippee’s envy. Surveys about consumers’ attitudes toward tipping and its alternatives that have been conducted in the United States over the past thirty years, indicate that a majority of consumers prefer guaranteed server wages rather than tipping, and voluntary tipping over service charges.

Price Discrimination

Another major issue in tipping is price discrimination, which happens whenever customers are rendered the same goods and services but is transacted at different prices. Tipping represents a form of price discrimination, because it allows some customers to pay less than other customers for the same service. Although all customers must pay the same nominal price for a given service, they can differ in the amounts that they tip. Consumers may focus on nominal (rather than real prices) as they compare the expense of competing services. If they do so, the lower nominal prices made possible by tipping or service charges should improve competitiveness and increase demand. However, if consumers instead focus on real prices when comparing service providers, then lower nominal prices will not improve competitiveness.

Service quality plays a huge roll in price discrimination; it is a well-known fact that dining parties that rate the service highly leave larger tips than those who rate the service less highly. Furthermore, this relationship remains statistically significant even after controlling for customers’ food ratings, customer patronage frequency, and many other variables.

Server Incentives

One set of arguments for tipping involves its supposed incentive for servers to up-sell menu items and to superior service. In contrast, it is thought that service charges provide an incentive to up-sell, however, the quality of service may suffer. It is also thought that service-inclusive pricing provides no incentive for either activity.

It is true that tips and service charges are both generally calculated as a percentage of the bill, meaning that servers that up-sell more can expect to receive a higher tip. Many may argue that tipping exists because it is the most efficient way to provide service workers with an incentive to deliver good service. However, I believe after speaking with a few students at the CIA who have been servers for years, that the incentive for up-selling will motivate behavior only if servers have a sense of self-efficacy, and expect their up-selling efforts to affect customers’ orders.

However, I do believe that some incentive is necessary to provide good service, but tips are not the best route in my opinion. While I was a server at the CIA’s Caterina De Medici restaurant, our Professor, Chef Vincenzo Lauria would set up competitions to up-sell certain menu items. The rewards would vary from free meals in the restaurant or extra points on your grade or even the much sought after evening off. I believe that this reward system can be applied to the restaurant industry in a different form where the rewards are replaced with pay raises and more tables, while using service inclusive pricing. This will eliminate the issues that surround tipping while still providing incentive for servers to provide good service.

In addition to providing some incentive for the delivery of good service, tipping provides an incentive for several undesirable behaviors. First, it encourages servers to give less attention to members of groups known to be poor tippers. For example, there is an assumption that generally African American patrons tip servers less than Caucasians. Supporting this possibility, according to Michel Lynn "one study found that African Americans are half as likely as Caucasians to know that the customary restaurant tip is 15 to 20 percent of the bill and additional, unreported analyses of that study’s data indicated that awareness of the norm increases with income and education." In the United States, due to this perception, many servers dislike waiting on African American parties and deliver inferior service to those customers they must serve. (Lynn)

Pay Levels

According to the Bureau of Labor Statistics, tipped service workers such as bartenders and waiters earn hourly incomes that are roughly the same as those of non-tipped service workers such as hostesses, fast-food workers, cafeteria counter attendants, and dishwashers. However, tipped employees rarely report all their tip income so those statistics may be misleading especially for high-end establishments where tips are very generous. In fact my own experiences as a tipped employee and my conversations with other people here at the CIA suggest that many tipped workers earn far more in tips than they could possibly earn in wages from other types of work involving similar skill sets.

Income Tax Evasion

It is a well-known fact among those in the service industry that tips are a form of tax evasion. Unlike wages, tip income is easy to hide from employers and governments. As a result, tipping raises issues about unreported income. The Internal Revenue Service (IRS) estimates that about half of all tip income is undeclared. This under-reporting of tip income is both a benefit and a liability to service firms. It benefits service firms because the ability to earn undeclared and, therefore, untaxed income effectively raises the wages of service workers at the expense of the government rather than that of the service firms.

However, in order to combat this insidious practice, corporate restaurants are doing all they can to stamp it out. My friend works at one such establishment and has informed me that he is required to declare 100% of his tips on the computer before it lets him clock out for the night. Indeed, the potential for monetary hanky panky is high, but through due diligence, the government can track at least some tipped income, provided establishments keep good records of their employees’ declared credit tips.

Employment Discrimination

Service-inclusive pricing and service charge systems, place the compensation of employees entirely in the hands of management, while voluntary tipping places much of employee compensation in the hands of customers. One potential drawback of giving customers direct control over employee compensation in this way is that customers may discriminate against certain classes of people, which could leave establishments open to adverse impact discrimination lawsuits. Title VII in the Civil Rights Act of 1964 prohibits employment discrimination on the basis of race, color, religion, sex, or national origin.

If such discrimination appears so often, why not regulate what would in other fields be considered a difficult social and civil rights issue? Imagine, for a second, that what I stated above came to pass. Let’s say that we are a black server in a predominantly white, southern, lower class area. If the average customer of the restaurant we work at has a bias against black people, our tips would certainly suffer, no? This brings up a very important thought. Why not let the Federal Government have the final say in what otherwise is a very unfair server’s wage. In the state of New York, it is $5.35 an hour.

There is severe disparity in the wages paid and the tips earned. Granted, on a really good evening a server can make a lot of money, but what about the lean times? How is one to pay for health insurance, medicine, school, food, heat, and electricity? Without a regulated, fair servers’ wage, a personal economy, based upon the ebb and flow of a restaurant’s business could be ruined quickly with a bad economic downturn, such as the one we are experiencing at the present time.

Tip Pooling Pros and Cons

A system of tip pooling is often used to combat the disparity of wages earned within an establishment and create stability in the personal economy of servers. Tip pooling is usually the collection of all tips from directly tipped employees so that they may be reallocated among a larger group of employees. Pools can be considered legal when designed by employees themselves, and with distribution based on the level of employee customer contact.

Tip pooling or tip sharing is not mandatory unless specifically approved by your state. Tip pools are generally accepted to divide pooled funds up by hours worked. It is defined by the participating staff and not employer. Participation in tip pools should strictly be voluntary. The employer may recommend tip sharing when not participating in the pool. The establishment may demand a written definition of each pool. It has become clear that supervisors and staff members with supervisory responsibilities should not share in any pool. Tip pools can be a valuable tool when directly tipped staff are unable to specifically identify to whom each tip was directed.

There is no national consensus about what constitutes a legal tip pooling/sharing arrangement because it varies from state to state. For instance Massachusetts only allows tip pooling when the earnings are divided among the serving staff proportionate to the amount of service provided to the customer. California law states that all co-employees including those that are not directly involved in serving the guest receive a share of the tip pool. The only stipulation is that employers and supervisors do not receive a share of that pool. In Nevada they believe that all members dealing with the front of house service should receive a portion of the tip pool. For example a bus boy contributes to the service and well-being of a patron just as a server does in a restaurant establishment. Correspondingly, in a casino, the box men, cashiers, and floor men all contribute to the service given to a player.

I find tip pooling to be most effective at fine dining restaurants like Eleven Madison Park located in New York City. Considering that the server doesn’t do all the work for that table: the bussers pour the waters, clear each course, etc, and the food runners run each course. In similar situations tip pooling can be greatly utilized.

Should we continue tipping?

Personally I believe tipping is a broken system and that all restaurants should use a service included gratuity prices. Given the issue stated above I believe the cons out weigh the pros when it comes to voluntary tipping practices. However I do agree that there are potential repercussions to switching over to a service included price system. One repercussion is the quality of service. According to Bill Ross, professor of marketing and department chair at Penn State’s Smeal College of Business, "managers in service industries should think twice before abandoning voluntary tipping policies. Ross emphasizes that managers should be aware of the pros and cons of going tip free. "Getting rid of tipping may reduce the quality of service," he adds, "although customers may be more comfortable with the idea of no-tipping at first, they may feel otherwise if the service suffers because of it."(Ross)

Conclusion

The issue is not just gratuity, or tipping. The issue we are really examining is that of human rights. Today, we are faced with trials and tribulations that put our resourcefulness to the test. We are faced with a financial crisis. As discussed above, tipping itself, adds to what could be someone’s "Camel’s last straw." What if a server has a rough night, is sick or injured, and cannot effectively do their job. If that server is fired and happens to be a single person who has no family to fall back upon, that person would find himself in great difficulty.

I’m not advocating the redistribution of wealth at all. What I believe is necessary, is intelligent legislation regarding the base payment of service staff in the United States. A server’s hourly wage that is less than the Federal minimum wage is absolutely criminal, and the assumption that the difference will be made up for by tips is, well… you know what they say about assumptions.

As a frequent diner, outside my home, I have become sour to the idea of being socially required to pay extra for the server doing their job, as they are already being paid. However, as previously stated, I cannot, in good conscience let these people hang in the breeze, knowing that they are paid but a pittance to do their noble work. There is a fine line to tread here, between being uncaring, and being taken advantage of. Indeed, we must be socially responsible, all the while, looking after ourselves.

We make such a fuss over Health Insurance and Student Loans, but those in the seat of power in Washington are missing a very important point. People aren’t poor because they are lazy; people are poor because their basic human needs aren’t met by the legislated status quo for a minimum hourly wage. How does this relate to tipping and gratuity, and the issues surrounding it?

Waiting tables is a hard job. The people who take up this task know what they’re getting into. They serve us food and provide a service to the patrons. They acquiesce to our every whim while we are at their tables. They do their best to make sure we are happy and full when we stand up to go home. The least we could do in return, is to make sure they too, can be happy.