Are Automatic Gratuities Good for Business?

When it comes to gratuity and tipping structures, restaurants have become divided. The traditional tipping structure has started to fall out of fashion—not just because waitstaff, by and large, doesn’t appreciate subminimum wages, but also because the minimum is increasing all around the country. It’s made a lot of restaurants begin seeking alternatives to the usual model, and although there are a lot of choices and none have yet risen to the same prevalence that traditional tipping still enjoys, a few contenders have lately gained favor with restaurateurs. One such model is the practice of adding automatic gratuities to customers’ bills.

What Is Automatic Gratuity?

Though typically reserved for larger parties, these also make it easier to charge split checks. One thing to keep in mind with automatic gratuities, though, is that it’s designated differently by the IRS than tips. Instead, they’re considered service charges because customers are required to pay it and can’t determine a custom amount for themselves. This changes how you file and report the income on your taxes, so consider this when deciding between automatic gratuities versus tips.

Many restaurants give guests the option to tip in addition to automatic gratuities since non-tipped wages come with certain tax withholdings. On average, automatic gratuities fall between 15-18% of the bill, so this gives customers a chance to make up the extra couple of percentages (it’s considered polite to tip at least 20%).

Although automatic gratuities are federally legal, there are also state laws that you have to keep in mind. Tax reporting, for example, varies across state lines so it’s important to do ample research before deciding on a tip versus gratuity structure. Most advanced Point of Sale systems will help with tips, gratuities, and tax reporting; that’s why it’s so important to equip your restaurant with the most state-of-the-art technology, like the ones powered by eatOS and backed by our partners at Gusto.

Why Do Some Restaurants Prefer Alternatives?

Many restaurants, they worry about alienating their most loyal customers. They worry that they’ll be put off if forced to pay a fee, and want parties to be able to choose how much to give based on their experience. To let most guests keep control over how much they give, some restaurants are only enforcing automatic gratuities for parties over a certain size.

Other restaurants prefer not to use automatic gratuities nor the traditional tipping structure. There are alternatives to both that owners can consider, such as:

  • Tip Sharing: An amendment to the Fair Labor Standards Act in 2019 allowed for tip sharing between the front and back of the house as long as the restaurant pays everybody a full minimum wage (as opposed to the $2.13 tipped minimum wage). However, some states require paying a full minimum wage to all employees before tips anyway, while other states prohibit tip sharing flat out. Do your research first.
  • Service charges: Usually ranging between 15-22%, some restaurants use service charges to replace tips altogether. Owners have to disclose the distribution structure but otherwise have control over the charge amount.
  • Service-included: Also known as “hospitality-included,” this model builds the extra fees into the menu itself. Many customers like the lack of additional charges on top of a meal, but some can find a price hike off-putting. It builds goodwill to let them know that the increased costs are going toward employee benefits like paid leave, insurance, and a living wage for everyone.

There’s no “one size fits all” when it comes to choosing the gratuity or tip structure that’s right for your restaurant. It differs from business to business depending on their staff and customer preferences, whether you’re a casual or fine dining establishment and other factors. Before you implement a new structure, ask your employees what they think will work best for them and for you; as the face and front line of your business, they’ll know your customers best and can smooth the transition to a nontraditional structure. Communication about what they prefer also guarantees more contented employees, and happy staff work harder.

If you’re still worried about making the transition, it might be a good idea to add extra management hours to give customers a chance to ask questions directly to higher-ups without going through a middleman first.

No matter what model you choose, only you know what’s best for your business. Whether you choose to use automatic gratuities or not, always speak openly with your staff. Transparency and honesty make a better team and contented, communicative workforces make stronger and more profitable restaurants.

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