Food & Drink Banning Tips Can Save Restaurants, if It Doesn't Kill Them First

Editor's Note: Based on the massive amounts of feedback we got after publishing Kevin's 2016 three-part series examining American restaurants , we're going to continue having him dig into bigger issues affecting the restaurant industry throughout 2017. This is the first story in his new series.

The yelling was a problem. A little more than a week after the Berkeley, California Mexican restaurant Comal eliminated tips in favor of a service charge, a man came to eat tacos. The owners had been meticulous in planning the switch, and didn't want surprises. They put an explanation of the change on their website. And on the door. And on the menu. But this man managed to eat his tacos oblivious to all of the warnings, at least until the check came and he saw a service charge had been included. Then the man was no longer oblivious. The man was upset. The man began to yell. "He went off," said Comal co-owner Andrew Hoffman. "Yelled at his server. Cursed out the manager. Went on a rant about control, servitude, and a bunch of other stuff. Apparently not being able to tip brought out a lot of pent-up issues with him. It almost seemed personal." Restaurants are banning tipping. Some restaurants, anyway. The issue came to the fore in October of 2015 when Union Square Hospitality Group's Danny Meyer announced that he was getting rid of tips at his 13 full-service restaurants, but the fact is, Meyer wasn't the first. The no-tipping movement had been brewing for years, inspired by a mix of moral, racial, and gender-related issues, rising labor costs, concerns over discrepancies in pay between servers and cooks, and the increasingly shaky foundations of the restaurant business itself. All of those factors are just now coming to a head. And an entire genre of restaurants is set to fail if they don't figure out how to deal with them. But how? Ironically, what may be the best and only true path to long-term survival -- eliminating tipping -- is also a financial, cultural, and psychological minefield. Some restaurants have tried and failed spectacularly. Others are doing OK. A small handful are flourishing. And only one -- the one that could provide the template for all to follow -- is run by a former ballplayer and the longtime band manager of Phish. **

Ironically, what may be the best and only true path to long-term survival -- eliminating tipping -- is also a financial, cultural, and psychological minefield.

In some form, tipping's been around since the Middle Ages, but the version we recognize can be traced back to 17th-century England, in which landed gentry would leave small amounts of money for their friends' servants whenever they stayed with them (for more read Kerry Segrave's book Tipping: An American Social History of Gratuities). As the years went by, the practice filtered into cities, and soon became commonplace in London restaurants, coffee shops, and pubs (allegedly, one such establishment had a change bowl that read "To Insure Promptitude," which was quickly, albeit oddly, shortened to "tips"). From there it spread throughout Europe. After the Civil War, wealthy and pretentious Americans with semi-expensive hats began to travel to Europe to gather additional pretensions and purchase even more expensive hats, and they noticed this sort of thing, and started copying it when they got back. The practice spread quickly, especially in restaurants. But even from the beginning, it was divisive. The idea of perpetuating a class system where you tipped those below your social standing seemed to go against what the USA was all about. And as Forked author and labor activist Saru Jayaraman pointed out in an interview with The Washington Post, it also became a race issue, as more and more rural whites moved to cities to take jobs in factories, and the demand for quick restaurant food exploded. These restaurants often hired ex-slaves to work exclusively for tips at these so-called "penny places," so named because, as Jayaraman put it, the workers would "run in, grab food, and slap a penny on the table for the former slaves who were serving them their food." An unlikely anti-tipping alliance formed, made up of a combination of progressives, populists, union laborers, and Southerners opposed to tipping ex-slaves. Six states (mostly in the South) passed anti-tipping laws. President William Howard Taft was heavily involved in the movement. A popular 1916 manifesto written by William Scott called tipping "a willingness to be servile for a consideration" and mentioned that it was "what we left Europe to escape." But by the late 1920s, the idea was too popular and widespread to combat, and the Depression left most Americans without the time and means to fight for anything more than survival. Tipping, for better or worse, was now inarguably woven into the fabric of American life. Eighty years later, according to Professor Ofer Azar, tips alone in the United States "amount to $44 billion each year." Which leads us back to the Phish guy. **

Jason Hoffman/Thrillist

Even before Comal opened in Berkeley in May 2012, co-owners Andrew Hoffman and John Paluska knew they wanted to try something different. Hoffman was a pro-baseball pitching prospect, and then, after an injury ended that dream, briefly dabbled in academia. Paluska went to Amherst then spent nearly two decades as the band manager for Phish. Comal's chef, Matt Gandin, spent years pursuing a doctoral degree. "We started to think about [tipping] right away," said Hoffman. "And read basically everything Jay Porter wrote." If the no-tipping movement has a godfather, it's Jay Porter. In 2004, Porter, a former computer consultant, opened The Linkery, a hip San Diego restaurant which garnered national attention in 2006 when it eliminated tipping. In 2008, The New York Times Magazine called it "perhaps the nation's only anti-tipping laboratory." During Porter's tenure there (he now lives in Oakland and owns The Half Orange, a sausage-and-beer joint), he kept a blog documenting the highs, lows, logistics, and philosophy behind running a tip-free restaurant. It became a must-read for owners interested in dipping their toes in the gratuity-free waters. "He must've written like 500,000 words," Hoffman said. "And we read most of them." Comal quickly became a critical and commercial success. But, with Porter's musings in mind, Hoffman and Paluska started planning to eliminate tips. They met with other restaurant operators, lawyers, and financial planners. They went through two years' worth of house data. "We knew what people coming in were averaging tipping," said Hoffman. "We knew what our servers and bartenders were making, on average, per hour. We went through everything." In the months leading to the switch, Comal went into overdrive. It settled on adding a 20% service charge to the menu (versus all-in pricing, which incorporates cost into meal price). Then, unlike other no-tip establishments like Alice Waters' legendary Chez Panisse, it opted to get rid of the tip line on the bill. This, Hoffman said, is the major place where tip-free restaurants get it wrong. "You absolutely cannot leave the tip line," he said. "I talk to [restaurant] operators all the time who include an 18% service charge but leave the line on there, hoping to make up a few dollars for servers, and nearly all tell me they have to staff an extra person to field calls the next day from angry diners who say, 'Look, I was drunk on rosé last night but now I'm sober looking at my credit card and I tipped twice.'" Most important, the owners guaranteed their front-of-the-house staff they'd make at least what they were currently making in the tip system, and managed to give the back of the house (cooks, dishwashers, etc.) a $2 raise. This, Hoffman said, is where running the restaurant for two years prior was vital. "We knew exactly what the servers were pulling in, on average. And we could show them." This, too, proved essential. "The narrative right now is that the front of the house has to take a pay cut to make this work," he said. "But we knew damn well we couldn't give anyone even a 10% pay cut and expect them to stick with us. Many had been working for us for two years. They were crucial team members. We had to do right by them, or the whole thing wouldn't work." And then they pulled the trigger. **

"Can you imagine working like that," said Hoffman, "where people are literally pulling dollars from your paycheck because they thought you were late giving them a water refill?"

If tipping is so ingrained in our dining scene, why even try and get rid of it? There are two main arguments. The first is moral. Even putting aside the uncomfortable historical racial and class issues above, the tipping dynamic is awkward. Studies have shown diners judge servers (and therefore adjust their tips) based on looks and race, and servers judge diners (and therefore adjust their effort) on age, race, and ethnicity. The server is incentivized to drive up the check and manipulate the diner. And the diner can use the tip as a weird form of punishment/reward. "Can you imagine working like that," said Hoffman, "where people are literally pulling dollars from your paycheck because they thought you were late giving them a water refill?" The second argument is wage discrepancy. Perhaps accidentally, the combination of our tipping culture with a hike in restaurant prices and an increasing minimum wage in many cities has created a professional serving class unlike any other in the world. "There is no other country with such overqualified servers," said Kurt Huffman, owner of Portland restaurant group ChefStable (which includes 18 Portland-area restaurants/bars). "We've got people with law degrees, masters, doctorates, who still want to work as servers. Partially because they love food and want to celebrate it. But also because they're getting paid so well." Servers and bartenders at casual fine-dining restaurants in cities can make upwards of $60k to $100k a year, but because their wages aren't controlled by the restaurant (but instead by the guests), it creates a strange dynamic. "It's like they're renting a barber chair in your restaurant," said Comal's Hoffman. "To a certain extent, they barely even work for you, and more often than most people would think, they're making more money than you." The money draws talented people into the industry, and, as such, keeps restaurants well-staffed in the front of the house. "You'll never see busy city restaurants clamoring for servers," said Huffman. "Not in the way they do with cooks." But as server wages continue to rise with increased meal prices, back-of-the-house wages aren't increasing at the same rate, at least partially thanks to a variety of legal decisions outlawing tip pooling -- a practice meant to share tips between servers and back-of-house workers. The most recent of these was Oregon Restaurant & Lodging Association v. Perez, in which the Ninth Circuit Court of Appeals ruled employers cannot require tipped employees to share tips with untipped employees who don't interact with the customers. These laws have good intentions (this one being that sketchy managers and owners were pulling money for themselves out of pooled tips), but handcuff honest owners/managers. As a result, there's a widening discrepancy between front and back. On one side you have this flourishing server class. On the other, you have an increasing number of ultra-talented cooks making terrible money and/or leaving the business because they don't make enough money to justify staying in it. What we're seeing, in a sense, is what's playing out on a larger scale in the rest of the economy -- a wedge driven between the haves and have-nots -- except this time it's happening within the confines of a single restaurant. The fragile balance, the symbiotic equilibrium that needs to exist to sustain the health of a restaurant, is being thrown off. At a certain point, it will break down entirely. But, like I said, getting rid of tipping is a lot harder than it sounds. **

Jason Hoffman/Thrillist

It's hard to really pin down the number of casual restaurants that have gone, or are currently going, tip-free. Hoffman shared a spreadsheet of 212 restaurants. For this story, I reached out to 30 around the country, and heard back from half. As you might expect, opinions and experiences were all over the map. ChefStable's Kurt Huffman was the most vociferous opponent of going tip-free after doing it at his beer hall, Loyal Legion. Huffman was paying $18 an hour to front of the house (which would get another $3 an hour because "people still left tips no matter what we said") but after four months he sat the staff down and admitted he didn't think it was working. Customers were weirded out and drinking less. Servers weren't making as much. The bar was losing money. "My hubris had overwhelmed my business sense," he said. When it switched back, Huffman kept the pay raise for the back of the house but started paying servers $10 an hour again. Within one business cycle, the servers began averaging $32 an hour, making 50% more than they were during the no-tipping experiment. On top of that, Huffman's costs went from $21 an hour to pay front of the house (including tax) to $12. "I'd cut my costs in half and raised my server wages by 50%. And this is the only one of my restaurants out of 20 where we've had no issues keeping kitchen staff." He admits Loyal Legion's size (there are only two people in the kitchen, as opposed to a bigger restaurant with, say, 12-14) also helps. "I'm not sure how you'd digest the cost of the raise to the back of the house in a big restaurant." But he's also wary of the idea that the system can really change. "When you start embracing the hubris of trying to alter an entire business model, it's really risky. All I can say is 'good luck with that.'" Adam Hebert, managing partner at The Radler in Chicago, also moved back to tipping after a year, but had a considerably better experience. "Switching back was one of the hardest decisions I've made in this business." Hebert said that eliminating tipping offered up "so many positive aspects, it was mind-blowing." He rattled some off: "Restaurant was easier to manage, entire staff was more hospitable and effective, entire atmosphere much more positive." One of the biggest criticisms of no tipping is that service drops off, but Hebert disagrees. "Service got better -- the mentality of why we're doing what we're doing changed. Before, no one wanted to help anyone else be a server either, because they were territorial, but now the more senior servers started training each other to gain more responsibility. I had bussers who'd been just that for eight or nine years, and now they're learning how to talk about beer, and make simple cocktails, and do things to help out the staff, because everyone benefitted." In the end, he said, they had to switch back because of two reasons. The first was financial. "We just didn't make enough money to sustain it, honestly." The second was more complicated. "It was kind of a turn-off for people coming in," said Hebert. "A turn-off in the sense that they didn't understand it. And it's not the consumer's job to care because they have no incentive to say, 'I want this to be different.' Until that happens, I think we'll have a hard time changing what we're doing." Chef Cara Stadler, who, along with her mother, owns and operates Brunswick's Tao Yuan and Portland's BaoBao Dumpling House, became the first Maine restaurant owner to make the switch, adding a service charge. Now three months in, she -- like many others -- immediately noticed a change in the way people ordered. "They're now spending more money on food and less on alcohol. It's just hard to rationalize that second drink with the surcharge." After the change, she lost 50% of her front-of-the-house staff. And she admits to taking a financial hit, estimating losing, at least in the short term, "$30,000 or so." Despite that, she remains philosophically opposed to tipping. "Everyone talks about sustainability of their food, but I think we should be talking about sustainability of our staff, too," she said. "At what point is it worth just paying your bills if it's to all these unhappy ends? Americans have shown that they'll take moral stands if they feel like a company is mistreating their employees [she mentions Walmart], but I'm just not sure if the American public is truly informed as to what's happening in restaurants right now. I have to believe that once they really know, they'll be ready to make that change." Stadler laughed. "God, I hope it happens sooner rather than later." **

There are a few factors that doom some no-tipping partisans to failure. The big one is psychology. We Americans feel guilty when people wait on us, and tipping acts as a monetary penance to offset that feeling. As psychologist Ernest Dichter put it, "The need to pay, psychologically, for the guilt involved in the unequal relationship is so strong that very few are able to ignore it." But we also like tipping because it gives us the illusion of control over our dining experience. ChefStable's Huffman has a theory on all of this. "When people in America go out to dinner, they use two different currencies. The first is their hard-earned dollars, which they'll spend on the food and drinks. And so they'll thoughtfully scour the menu and look at prices and think things through before they order those things." But the money they tip with is different. "That's basically Monopoly money," Huffman said. "It's automatic. The willingness to tip an extra dollar is tenfold what it is to pay an extra dollar for your food." The logic goes like this: Because I hold the ability to control the amount of money my server gets, they will be forced to treat me well. But this is, of course, stupid. Unlike an interaction with a bartender, in which a good tip on your first drink might encourage better service on your second, the server is tipped at the end of the meal, and though you might make them feel good, their service is not going to improve ex post facto. As Professor Azar put it in "Tipping Motivations and Behavior in the U.S. and Israel," a tip is "a voluntary payment that does not buy something real in return." And regardless of the service, chances are you will still end up tipping 20%. Upserve looked at anonymized data from more than 3,000 restaurants across all 50 states over a recent month and found a consistent range of 15-25% across all 50 states. And most people tip this way regardless of their server's behavior. Cornell University Professor Michael Lynn published a 2001 paper analyzing 14 studies examining the relationship between service and tips and found that though "tips increased with the perceived quality of service, the relationship was weak enough to raise doubts about the use of tips to motivate servers, measure server performance, or identify dissatisfied customers." Like I said: stupid. **

Jason Hoffman/Thrillist

After months and months of prep work and planning and role-playing, on November 3, 2014, Comal scrapped tipping. The staff braced for a backlash, but none came. Hoffman read me the manager's log from that first night. It reads: "Service charge went as smoothly as we could've hoped. Diners were receptive." And then further down, there's a note: "Interestingly, the most repeated question from customers was - are you doing this because people aren't tipping enough?" Of course, there was the yelling taco man (which should be the name of a Phish song), and plenty of others who insisted the service charge be taken off the bill once they learned about it. But all in all, eliminating tips at Comal was an honest success. "Within the first week, I had servers coming up to me asking, 'What have I gotta do to get a raise? How do I become more valuable?'" Hoffman said. "Instead of spending all their time trying to figure out how to further manipulate a larger tip out of a guest, they were figuring ways to add value. I'd been managing restaurants for a decade, and that had never happened before. It was incredible." Perhaps more incredibly, none of the staff left. Comal kept every single employee for at least six months after the switch. **

If you can get past that, you have another problem. The financial costs of going tip-free, especially in the short term, are steep. For Comal, the 20% service charge added to each check meant "top-line sales" at the restaurant automatically went up 20%. And this is a big deal because anything you pay based on those top-line sales becomes more expensive. In California, this meant its LLC fee, business license, tourism taxes, and general liability insurance all increased. Also, as Maine restaurateur Stadler already pointed out, you lose the federal tax credits the government gives restaurants with tipped wage employees. "That's a huge expense," said Hoffman. In 2013, Comal received $30,000 back because of that tax credit. Now, however, "we just have to eat it." And because most restaurants (though they're loath to admit it on the record) don't report all tips, when they switch to no tipping and their payroll is all accounted for, expenses around worker compensation, matching payroll taxes, vacation time, and sick pay all go up. Hoffman said the last two are particularly huge because, for a Comal server, they both get paid out at their full hourly wage (on average, around $35 hour), as opposed to the minimum wage. But -- and this is the hardest part for most people to wrap their heads around -- if you can figure out how to make the financials work in the short term, you can finally actually control your costs. Because you now have access to 20% of your revenue you couldn't touch before, and you can allocate it as you see fit for renovations, food costs, or any other expenditure, like literally every other business that has ever existed. But here is where lots of restaurateurs break down, because figuring out how to allocate the money fairly while keeping the front of the house at their wages and increasing the back of the house involves, as Hoffman said, "black-belt management techniques." In other words, this shit is complicated. It involves things like consulting models, scouring data, and knowing everything happening in your restaurant with a Scientology Auditing-level of depth. Comal re-examined everyone's normal job and side work, and altered the division of labor so prep cooks could start doing bar prep instead of bartenders to save money, and had new servers come in at a lower wage so they earn their way up rather than staying at a fixed wage, and used those savings in the meantime to help pay more to the back of the house. It set growth incentives so people didn't just stagnate in their jobs. There are employee reviews. But, as Hoffman admits, this sort of in-depth approach can only work if you're up for it. "So many restaurants, for so long, were just looking in the till at the end of the night and the money in there was what they made. But with all these costs going up, that era is over. Eliminating tipping allows you to have control and be more fair, but it's also harder. Some people don't want that. And a lot of them are going to have to close." **

At this point, with around 200 restaurants nationwide (out of over 600,000), the anti-tipping movement is still very much in its infancy. Plenty of restaurant power hitters (David Chang, Gabe Stulman, Thad Vogler, Tom Colicchio, um, Joe's Crab Shack) have stepped up to the plate and then backed away, saying that diners aren't ready, that servers won't accept it, that tipping is just too ingrained in the American DNA to change. But there is an opening here. All of the factors causing the restaurant bubble in the US (cook shortages, rising labor costs, a glut of inventory, etc.) have made the casual fine-dining restaurants that have driven our 21st-century culinary renaissance extremely vulnerable. Many will go under regardless of what they do, but for others to survive, they'll need to adapt. And nothing forces change faster than desperation. There is some good news here. Those who've had success in the tip-free realm are offering to open up their books so others can see how they did it. Hoffman estimates he's spoken to 75% of the restaurants trying to go tip-free. Nick Kokonas, co-owner of Chicago's revolutionary Alinea, Next, and The Aviary, told me his tip-free restaurants had "record sales and margins last year, just under 30%," which he attributes to "our constant experimentation on the business side with new ways of booking restaurants, looking at food costs, adjusting labor," etc. He pointed out that most places closing are chef/owner spots where the chefs often "disdain the business side of things," but his goal is to be more open about Alinea's practices so others can improve their operations and stay open. As for Comal's Hoffman, he sees this year as a turning point. "I feel like I've been screaming fire from the rafters for years, and finally, in the past year, owners have realized they need to be thinking about these things," he said. "They see the walls closing in, but it's up to them to pull themselves out. All I can do is show them the rope." Sign up here for our daily Thrillist email, and get your fix of the best in food/drink/fun.