Per Se ends tipping in favor of service charge

[Carrot Top]

I would like to bring to attention a very well written and interesting rebuttal.

Some of the points they make are worthy of thought.

I've certainly known difficulties to arise with tip pooling.

The thing is. . .if a restaurant is going to enter into a more formal method of compensating their service staff (which the 20% service charge would be) there has to be a more formal method of assuring that the staff knows what the sales are each day. An easy way to do this is to post them in a simplified form each morning.

Edited August 11, 2005 by Carrot Top (log)

[markovitch]

Employees demanding access to financial records?

In an industry where you can get fired for pretty much anything, the fantasy of honest and well run restaurants profit sharing, paying livable wages and providing benefits is far to grand for me to imagine. Not to say it doesn't happen in some places, but arguing for whole-scale conversion? only in the most perfect world.

[Fat Guy]

It happens in some places . . . like in entire countries.

[TPO]

It happens in some places . . . like in entire countries.

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Other countries have one benefit we don't -- universal healthcare. It's much easier to guarantee a living wage when the employer doesn't have to shell out $200-700 a month to provide health insurance for each employee.

One potential problem I see with services charges and pooling is that the employee is still carrying the risk -- not the restaurant. If business is slow for a few days, the restaurant only needs to ensure its employees make minimum wage. I may pay for labor at the local auto shop, but those employees get paid a decent wage and benefits whether there are cars there on any given day or not. They aren't dependent on my labor charge being divided equally between all mechanics, not knowing on any given day whether they will make $5 an hour or $40 or what they will do if they need to see a doctor.

I'm not sure what would be best for servers, but I am open to seeing the current system change in some way.

[Carrot Top]

Employees demanding access to financial records?

In an industry where you can get fired for pretty much anything, the fantasy of honest and well run restaurants profit sharing, paying livable wages and providing benefits is far to grand for me to imagine. Not to say it doesn't happen in some places, but arguing for whole-scale conversion? only in the most perfect world.

←

Oh. . .I am not arguing for whole-scale conversion. It would take a greater ability to focus on the many variants that are involved than I have. . . for this is no uncomplicated matter.

But the more one talks about and talks up the idea that it is possible to redefine an industry in a way that the industry could be re-shaped in ways that would be better for everyone involved. . .then the more concepts emerge that could potentially be utilized in the industry.

I am an eternal optimist in a quietly fighting sort of way. If one can't close their eyes and imagine that it would happen. . .and if one can not put blinders on and muddle through things that otherwise would really be cause for despair. . .then really there is nothing to do but despair.

Other industries have been re-shaped in the past. . .and have provided both better quality of life for their employees and better overall performance.

Should this happen in the restaurant industry?

Only if enough people believe it should. . .

As far as "employees demanding access to financial records". . .I did not envision the employees demanding. I envisioned the managers providing access, perhaps in meetings where they could also provide a clear understanding of the global picture of "how things work" in a global sense in the operation.

This sort of thing often creates the bonds of a real team between management and employees. . . .and it does that really fantastic thing often, too. . .it helps the possibly reluctant or frightened employee to "buy in" to what is going on.

If employees do not "buy in" to a way of doing things, things will never really run well no matter how many policies or procedures are put in place.

[Fat Guy]

It happens in some places . . . like in entire countries.

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Other countries have one benefit we don't -- universal healthcare. It's much easier to guarantee a living wage when the employer doesn't have to shell out $200-700 a month to provide health insurance for each employee.

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I think the healthcare argument is a bit of a red herring. Most every US industry other than the restaurant industry (and a few other anomalies) has figured out ways to pay its employees living wages without the need for tipping. The restaurant industry is given a special (and, I think, wrong-headed) exemption to the minimum wage so that it can perpetuate a system that might not otherwise be sustainable. It's also worth noting that healthcare is never "free." It may cost more in the US, but it's not free anywhere. One way or another, it gets paid for -- either by taxes or by employee contributions. In France, as I understand it (and this is not an invitation to a debate about healthcare -- I'm just trying to define its relevance to the case in point), healthcare is funded primarily by a tax on wages. Those wages are paid by . . . employers. So I fail to see how this makes it categorically easier to pay servers a living wage in France than in the US.

[Holly Moore]

The discussion on taxes got me thinking about a result of the service charge that Keller might not have anticipated. Per Se's employee benefit cost is very possibly going to sky rocket.

I'm assuming that the service charge, as it is passed on to employees, has to be treated as payroll. Both employee and employer will have to pay federal, state and local taxes on the service charge.

Per Se is essentially increasing its payroll by 20 percent of its sales. It is possible that Per Se runs a 20 - 25% labor cost. If it is 20 percent, Per Se is actually doubling the labor cost by incorporating the service charge. The payroll cost won't be more as it is a wash with the service charge. But all the emloyer taxes are going up - employer share of FICA, Medicare, Federal and State Unemployment and any other wage based taxes New York State or City might impose.

Let's say Per Se sales are $3 million - total guess and probably low. That means Per Se's payroll just went up $600,000. The employer share of FICA and Medicare is 7.65% on the first 90,000 earned. That means on $3 million in sales, Per Se's employee benefit cost went up almost $50,000. Add Federal and State Unemployment - probably another maybe $10,000. I'm estimating that will be a 75 percent to 100 percent increase - tough for any restaurant, even a very successful restaurant to absorb.

Workmen's compensation insurance is also payroll based. That is going to go up too. Not sure if it is scaled down with volume. If not, it will come close to doubling too.

I'm also assuming the service charge collected will be considered revenue. Other costs and taxes are based on gross sales. In Philadelphia there is a business privledge tax that is partially based on an establishment's gross sales. If that is the same in NYC, more taxes to pay. Plus insurance rates are based on sales. It could be the same with the lease a base plus a percentage.

This is somewhat overstated as Per Se has already been declaring a percentage of server tips for the server. But I'm not current on how much that need be.

All in all, while I only play a CPA on eGullet, this could be a very expensive decision for Per Se. Perhaps the next step will be for Per Se to add tax and insurance surcharges onto the service charge as UPS does with a fuel surcharge, to cover the additional expenses.

Then again, maybe a real CPA has a way around all this.

Edited August 11, 2005 by Holly Moore (log)

[Fat Guy]

I too am not an expert, however I'm sure you're incorrect about at least some of your calculations. Tips, for example, are definitely subject to FICA tax for both employers and employees. So there should be no categorical change upon switching to a service charge.

[Holly Moore]

My understanding is that the employer declares a certain percentage of the tips for the employee but not all of it. The service charge would definitely increase Per Se's cost.

Added as an edit - from Paychex's summary of tax regulations for restaurants:

Allocate tips if total tips reported by employees are less than 8% of gross receipts (excludes carry-out sales, receipts with a service charge added of over 10%, and state or local taxes).

Report tip allocations on W-2 forms (for each employee who didn't meet their share of the 8%).

If I am reading this right, restaurants are reporting 8% of gross sales as employee tips. Per Se will be forced to report an additional 12%.

Edited August 11, 2005 by Holly Moore (log)

[Bux]

My understanding is that the employer declares a certain percentage of the tips for the employee but not all of it.  . . . .

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My assumption is that a restaurant declares 100% of what's included as a tip on the credit card slip, at the very minimum.

[Fat Guy]

I believe all tips have to be declared, and I don't think the issue of allocated tips is relevant to what we're talking about.

French Laundry has had a service charge for a long time. I'm sure Keller's management team is fully aware of the tax and fee implications of the switch. In addition, most establishments use service charges in one way or another. Most every restaurant has service charges for tables of six or more, and for private functions. I imagine this ground has been gone over and found not to be a barrier to the efficacy of the service charge.

[Fat Guy]

My understanding is that the employer declares a certain percentage of the tips for the employee but not all of it.  . . . .

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My assumption is that a restaurant declares 100% of what's included as a tip on the credit card slip, at the very minimum.

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In the 21st Century if a restaurant tries to declare credit card tips but not cash tips, the IRS will come down on the establishment like a ton of bricks. There may be a little wiggle room left on the cash side of things, but the days of pocketing all the cash tips and declaring none of them are over.

[Bux]

. . . .

Maybe that's the key! The Yuppie crowd leaves tips because of the aforementioned and my crowd (50's) leaves tips based on the service.

Where's that study when I need one????

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It may simply be that there's a generation gap between what you know to be true and how the world exists. I don't know the range of restaurants at which you worked, nor the period in our history that such employment covered, but today's average diner and waiter, not to mention surgeon, all seem younger then they did when I was younger. It doesn't seem reasonable to hold to one's personal experience over that of independent surveys, although I understand the emotional problem in letting go. To hold on to personal experience that's not current and argue as if it's both current and common, is not going to offer the basis for sound arguments likely to influence others.

[Holly Moore]

Best I can surmise from this article - the burden to report tips accurately is shared by the employee and the employer.

Restaurants are required to report credit card tips. Both restaurant and employee must pay taxes on any reported tips.

Restaurants are required to file a form with the IRS stating total sales, total credit card sales, totals credit card tips and total tips reported by the employee.

It is solely the burden of the server to report cash tips (assuming the credit card tips make up more than 8% of sales). I assume that most of Per Se's sales are by credit card. But I am not sure what percentage of credit card customers add tips and what percent of customers want to be "good guys" and leave a cash tip. Most likely more people do add the tip to the charge sale, but not all.

Another consideration is the assumption that on large checks, especially those where wine is a significant part of the check, many customers do not tip a full 20%. If that is the case, then the service charge on credit card sales will total more than the voluntary gratuity added by the customer. As a result, overall gratuity as a percent of sales will increase, meaning higher employee benefit costs once the service charge is imposed.

All in all, Per Se's employee benefit costs, as a result of imposing a service charge, will increase over what they are now. Not as much as I initially thought, but they will go up.

There is another rub from this article. Service charges imposed by a restaurant are considered sales by the IRS and many states and municipalities require that the restaurant must collect sales tax on the service charge. If that is the case in NY or NYC that would make the service charge paid by the customer more that 20%.

Edited August 11, 2005 by Holly Moore (log)

[KatieLoeb]

My understanding is that the employer declares a certain percentage of the tips for the employee but not all of it.  . . . .

←

My assumption is that a restaurant declares 100% of what's included as a tip on the credit card slip, at the very minimum.

←

In the 21st Century if a restaurant tries to declare credit card tips but not cash tips, the IRS will come down on the establishment like a ton of bricks. There may be a little wiggle room left on the cash side of things, but the days of pocketing all the cash tips and declaring none of them are over.

←

The paper trail created by the credit card slip leaves neither the restaurant nor the employee much "wiggle room" in terms of declaring those tips. However, most servers have to tip out bussers, food runners, bartenders, etc, so they aren't really seeing every dime of that tip that's on their receipt. I suspect that may be why many servers declare little if any of their cash tips, because they feel they're already being forced to declare monies that don't necessarily end up in their own pockets. I've solved this problem in the past by tracking the actual tips paid to each employee each shift, and then paying them as a lump sum on their paycheck each week. They may wait a week or two to see that money, but they aren't being credited for monies not genuinely going home with them either. Makes their taxes a bit easier to handle each year and they don't end up owing the IRS a big chunk of change every April 15th.

In a restaurant that is primarily a credit card establishment, it's easy enough to show that 90% of your revenues come in the form of credit card bank transfers (that you are then paying service charges on) if one were to get audited.

[Bux]

. . . . 

Personally, I won't go below the 15% line unless it was truly bad service. But I will go to 25% for exceptional service (as I did at Per Se). But now it will never cost me more than 20% at Per Se. Who loses?

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Don't be silly. In France, where service is included, it's not uncommon to leave a few coins on the bar or 5% at a restauraurant. Some people leave 10% at a good restaurant and that's in addition to the included service. Tips are always in cash, never added to the credit card amount. My guess is that a minimum service charge will not decrease the take for waiters in the long run.

Rich, you refer several times to your experience and in a way that implies it's more extensive, or at least more reliable than the independent studies. Could you explain why? I find the studies reasonably reliable.

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Believe me Bux, if I'm being silly, you'll be the first to know - I promise. I'll even e-mail you privately if that would help your cognitive abilities.

What they do in France has absolutely no relation to what will occur here. I think that's clearly evident from the political and socio-economic climate in both countries.

While there may be some people who will throw a few dollars extra into the pot, I doubt many will, especially at 20% of the total bill including wine. At Per Se's prices, it would be rare that more than a few would leave more.

I've always found personal experience to be more reliable than studies. For one, the methodology (which may be flawed) is unknown except to the study's sponsors. Secondly, there are always built-in prejudices with studies - the same as with political polls. Finally, when studies are done where cash is involved they are notoriously inaccurate. Anyone who has taken Economics 101 understands that. People are not completely "up-front" when speaking about cash. And cash is left for tips - at least occasionally.

When I worked as a waiter, I witnessed certain people making substantially more than others and it wasn't for one night or one week - it was over several years. Obviously, the study or studies never included the restaurants where I worked.

So to answer you're opening query - no I wasn't being silly, just factual.

I hope this helps in solving your dilemma.

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Rich, it appears somehow you misunderstood or attached too much importance to my choice of the term "don't be silly" and that you felt personally insulted or slighted to the extent that you needed to attack my abilty to understand in lieu of debating the points. For putting you in that embarrassing position, I deeply apologize. Trust me, I don't believe anyone here believes you are silly because of what I say. My comments do not make you look silly.

It was simply my jovial and light hearted manner of noting that in a country where the service was included, ironically, the practice of tipping has not been eliminated and that slowly, tips are rising in France. Of course France is not the US, and ever since the end of the Second World War we've been defiently rejecting any influence the culture of cheese eating near-communists may have on our life style, especially in the realm of dining and restaurants. I actually don't know what will happen here.

I have no reason to question the fact that your long term experience as a waiter over a long period of time, as well as your experiences as a diner that transcend independent studies of groups of diners, leave you in the perfect position to predict exactly how the majority of Per Se's diners will react. I certainly have no clue.

Moreover, based on your posting history, I will be the first to agree that you've always found your personal experience to be more reliable than other people's studies. Without having studied Economics 101, I couldn't begin to dispute that there are always built-in prejudices with studies or that you wouldn't be the first to e-mail me about any prejudices you held, if you held them. I don't mean to be facetious. Those studies do not include your experiences and from your experiences, and you are able to dismiss those studies. Obviously, when we factor in both your experience and that which you dismiss, we have a larger sampling. About the only thing I know is that I don't insult other people's intelligence or question their "cognitive abilities."

[smgarsh]

but the question is, how many diners @ PerSe actually pay their tip in cash?

It's now $175 pp. Thats $350 per couple excluding beverages and tax.

A meal for 2 can easily be $500. After a certain $ amount I think a lot of people will pay their tip with their CC.

[Carrot Top]

Here are some questions that are vaguely running through my mind:

Do you think that Per Se had a formal cost/benefit analysis done on this before implementing it? (By their accountant or by an outside consulting firm. . .)

Who is Per Se owned by. . .a partnership? An individual?

Do you think that any sort of formal or informal poll was taken on what the service staff reaction (or indeed, even all staff reaction) would be to implementing this policy. . .before implementing it?

Do you think that this change was implemented purely for reasons of what they hoped would be good business management for their own place. . .or do you think that it included a portion of "wanting to change the world" in the implementation of it. . .a hope that what they did would affect others in the industry?

If a cost/benefit analysis were to be done on this, could it even be done to show what some of the "softer" benefits might be long-term? (These "softer" benefits would be things like employee satisfaction and retention and level of customer service.)

Just curious.

[TPO]

In France, as I understand it (and this is not an invitation to a debate about healthcare -- I'm just trying to define its relevance to the case in point), healthcare is funded primarily by a tax on wages. Those wages are paid by . . . employers. So I fail to see how this makes it categorically easier to pay servers a living wage in France than in the US.

←

True, so I will substitute "not-for-profit healthcare" for the term "universal healthcare." That alone, regardless of who is paying for it, reduces the cost significantly.

Most every US industry other than the restaurant industry (and a few other anomalies) has figured out ways to pay its employees living wages without the need for tipping. The restaurant industry is given a special (and, I think, wrong-headed) exemption to the minimum wage so that it can perpetuate a system that might not otherwise be sustainable.

←

I agree and I think this is why tipping has been bothering me in recent years -- it gives restaurant owners cheap labor while shifting the risk of the business from its owners to its employees.

The discussion on taxes got me thinking about a result of the service charge that Keller might not have anticipated.  Per Se's employee benefit cost is very possibly going to sky rocket.

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Interesting thought. I wonder if any increased costs could be offset by that fact that now that all his employees are considered "tipped," he would no longer have to pay them more than $3.85 an hour? Although perhaps he still plans to pay people wages based on their jobs and experience.

Do you think that this change was implemented purely for reasons of what they hoped would be good business management for their own place. . .or do you think that it included a portion of "wanting to change the world" in the implementation of it. . .a hope that what they did would affect others in the industry?

If a cost/benefit analysis were to be done on this, could it even be done to show what some of the "softer" benefits might be long-term? (These "softer" benefits would be things like employee satisfaction and retention and level of customer service.)

Just curious.

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I'd like to see an interview with Keller to find out what his motivations are. Not that it matters, I'm just curious as to whether it was a good business move, an attempt to change the system, or a little of both.

Either way, I cannot imagine such a change was made without a cost/benefit analysis as well as a long-term benefits analysis.

[Fat Guy]

Thomas Keller had much to lose and little to gain by opening a restaurant in New York City. He was already America's foremost chef, operating a highly profitable restaurant, and could have stayed in California, relaxed and retired as such. The whole New York enterprise is inextricably linked to factors unrelated to profitability: Keller's legacy as a chef, his sense of an obligation to teach, his long-held desire to make a comeback in New York and in general his idealism about all things culinary.

In addition, he already operates a going concern -- again, a highly profitable one -- that uses the service charge model. So it would not seem that newly commissioned cost benefit analyses would be necessary. He's just replicating an already successful decision.

My sense is that Keller didn't open with a service charge system because it was just too much. He was already opening in an uncertain location, in the wake of a sustained media hate campaign against Ducasse's New York restaurant, after having left New York in defeat in 1990. He knew he had to hire an entire new waitstaff, drawn from the existing pool of experienced New York waitstaff already addicted to the short-sighted cheap thrill of the tipping system. Now, with four New York Times stars, near-universal critical acclaim and no sign of ever having to worry about a single empty table, he seems to have acquired the stability and confidence to bring Per Se in line with his principles.

[Carrot Top]

So this is no "one-off" thing with the tipping system and his restaurant(s). . .its been done before and obviously the system has worked well in whatever financial ways it needs to for both the business and the staff. If it didn't work well, surely he would not risk it again.

The only difference here is California vs. NYC.

Interesting.

[Fat Guy]

According to New York Magazine, French Laundry in Napa grosses $7.5 million per year. So, yes, I think they're probably doing fine.

[Fat Guy]

In France, as I understand it (and this is not an invitation to a debate about healthcare -- I'm just trying to define its relevance to the case in point), healthcare is funded primarily by a tax on wages. Those wages are paid by . . . employers. So I fail to see how this makes it categorically easier to pay servers a living wage in France than in the US.

←

True, so I will substitute "not-for-profit healthcare" for the term "universal healthcare." That alone, regardless of who is paying for it, reduces the cost significantly.

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Still not sure I can agree. The French healthcare system includes both public, private for-profit and private not-for-profit care providers. But I don't suppose it's important to the argument. What you're saying is that healthcare costs in France are lower than in the US, and what I'm saying is that it's irrelevant. Yes, healthcare costs per employee are lower in France. But where's the evidence that overall costs per employee are lower in France? Having been involved in some international business deals, I can tell you that in my (limited) experience the per-employee costs in France are higher than here. Or even if it's a little bit less or more, France is still certainly an expensive country in which to do business and maintain employees regardless of the healthcare portion of the equation.

But all of that is beside the point. The appropriate basis for comparison is other US businesses. And it is beyond question that plenty of US businesses do just fine even though they have real employees and all the related healthcare costs. Restaurants don't need a special exemption. They just need to get their acts together and move into the 21st Century alongside real businesses.

[JeAnneS]

This thread is completely fascinating..it's taken me two days to read through it, but it was worth it!

My opinion is more along the lines of waiter in "waiter rant" blog. I think it totally works for a place like Per Se where you are going to get the highest service and attention.

My concerns are when the "non flashy" but darn good eats places start incorporating the same practice. Overall, my dining experiences are in the $$$ category...once in a blue moon going for the $$$$ And in my experience, I can count on one hand the times in my mind that service has been stellar at that $$$ price range. Most of the time it's adequate and my tip reflects that sort of average service. But if you go to different parts of the country (or world for that matter), it's a different experience. I find that the service quality is higher even at establishments where I am not expecting it. I don't know if it's a NYC "I'm not a waiter, I'm a writer/actor/musician" thing, but I worry that having a uniform service charge in place of a tipping system is only going to increase the general apathy in service.

[rich]

But all of that is beside the point. The appropriate basis for comparison is other US businesses. And it is beyond question that plenty of US businesses do just fine even though they have real employees and all the related healthcare costs. Restaurants don't need a special exemption. They just need to get their acts together and move into the 21st Century alongside real businesses.

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Exactly Steve, but I don't believe Keller's lastest effort achieves that goal nor is it the first step in attaining such a goal. In fact, if it's simply a re-tooling of the Laundry's policy, then he isn't breaking new ground at all, merely bringing it east.

As I stated in a post much earlier in this thread, let Keller absorb a "service charge" within Per Se's price structure and allow patrons to leave an additional tip (if any) according to the experience. And those tips, gratuities (whatever the name) should be retained by the people that earn them. At least that gives the wait staff an incentive.

Maybe this is just a New York or an older generation thing, but in my opinion, incentives still work.

PS - I noticed someone said the Laundry's service charge is 18%. Any reason why Keller went to 20% here?

Edited August 11, 2005 by rich (log)