Reimagining the Restaurant Business: The High Stakes of a No-Tipping Culture

Reimagining the Restaurant Business: The High Stakes of a No-Tipping Culture

Kicking off Sunday’s conversation around tipping — or the rejection of tipping — in today’s restaurant industry, the New York Times’ Jeff Gordinier quoted William Goldman’s famous line about Hollywood: “Nobody knows anything.”

While restaurants are experimenting with all-inclusive prices, service charges, and other strategies to pay cooks better and reduce the growing disparity between the front and back of house, right now it’s still the Wild West. Nobody really knows what’s going to stick. What we do know is that the economics of the industry are in flux.

Jeff moderated a panel hosted by Union Square Hospitality Group and sponsored by OpenTable, featuring three prominent restaurateurs: Kevin Boehm, co-owner of Chicago’s BOKA Restaurant Group, which still accepts tips; Renee Erickson, chef/owner at Seattle’s Sea Creatures group, where checks have a 20% service charge included; and Sabato Sagaria, Chief Restaurant Officer of USHG, which recently moved to a “Hospitality Included” model at three of the 13 restaurants, with the rest to follow. The event took place during the James Beard Awards in Chicago at GreenRiver, the new bar and restaurant collaboration between USHG and the team behind popular New York City cocktail bar, The Dead Rabbit.

Thad Vogler, restaurateur behind San Francisco’s Trou Normand and Bar Agricole, was also slated to join, but his flight was delayed. Thad eliminated tips at his restaurants in 2014 – becoming one of the very first to do so – before reverting back to the conventional model last October. We talked to Thad after the panel so we could include his take here.

Ultimately, the conversation centered around the top implications for all of the groups affected by the wage changes: restaurant staff, guests, business owners, and the industry as a whole. Here are four critical questions the no-tipping movement is trying to answer to determine the future.

Reimagining the Restaurant Business: The High Stakes of a No-Tipping Culture

Do guests really understand where their money goes?

It turns out there are plenty of misconceptions among restaurant customers when it comes to tipping. First of all, Sabato said, they think 100% of their gratuity goes to their server — not so, since tips are pooled within USHG (and Thad’s restaurants and many others, too).

Diners also think the kitchen staff gets a piece of the tip pie, which legally they can’t. USHG held town hall meetings for guests and prioritized PR and transparency to educate them about Hospitality Included so they would feel part of the decision and community.

Still, there are some people who just really want to tip. Jeff shared a funny anecdote about a person dining next to him at Maialino who insisted on leaving a tip — in fact, was outraged at not being able to. Those tips become an accounting nightmare in a no-tip restaurant and, frankly, defeat the purpose of the system. How do you make the mental and cultural shift happen for guests?

Renee and some of her peers in Seattle donate those unsolicited tips to charity and indicate so on the menu to drive home the no-gratuity message.

Sabato said it’s partly a generational thing: millennials who swear by Uber are comfortable with the concept, but others remember having to palm the maitre d’ to get a table.

There’s also a misconception that tipping is valuable feedback about a guest’s service. In reality, Sabato pointed out, management is probably never going do know why a guest left the tip they did – it could be that the food wasn’t cooked to their liking, something the server did, or any number of factors.

Real feedback about their experience is much more valuable than a tip, which is why his team uses old-school comment cards to solicit it. Similarly, Kevin sends out customized questionnaires to guests after dining so his team can read, digest, and react to their comments.

What’s the best way to motivate and incentivize your staff?

For any restaurant business, finding and retaining great employees is a top priority. In today’s system, cooks are making $11 an hour while servers are raking in up to $100,000 a year, creating a massive discrepancy. “Something’s got to give,” Kevin said.

He realized that if he wants to keep great cooks in the kitchen, he can’t pay them $10 an hour. He has accepted a higher labor cost overall in order to pay them more – and ultimately the restaurant is just that much less profitable.

There are also benefits to a system that rewards servers. Kevin opened his first restaurant after saving up $50,000 in tips from his serving and bartending jobs, so he’s wary of efforts to value cooks that could end up devaluing the front of house.

“Great servers are competitive,” he added, challenging themselves to make extra money on that busy Saturday night. If they make the same amount no matter what, that’s a different mindset. Plus, how do you encourage those servers that are working harder, selling more, and excelling in their roles?

When Trou Normand and Bar Agricole shifted to a no-tipping model, Thad assumed he could retain his entry-level front-of-house staff while paying $25-30 an hour. But he found that once they were trained, they would leave for another restaurant paying $35+. After almost a year he experienced so much attrition in the front of house that he had to rethink the model.

Interestingly, the more senior, experienced servers did stick around. They benefitted from a revenue-sharing tip pool system, and after Thad shared his learning with Sabato’s team, USHG adopted a similar system to incentive staff and celebrate their successes. USHG lost three front-of-house staff members after moving to the tipless model, but they’ve seen a 10% increase in retention. At The Modern applications for front-of-house staff are now up 200%; they’re up 250% in the back of house.

There’s one more way to make sure your servers are happy with their work and compensation: ask them. USHG was diligent about surveying employees to see how they felt about the shift and to offering transparency and education about the new system. In fact, Sabato said they told their 1,800 staff members about the change two months before they announced it publicly, and no one leaked to the press.

Renee did the same, asking her staff to fill out questionnaires to learn their thoughts and concerns. She also gives them access to a shared spreadsheet that shows exactly what percentage of the service charge everyone is getting every week so there’s no mystery about how the money is being allocated. It was critical for her to show that they are earning just as much now as they were with tips.

Finally, staff feedback was one of the primary reasons Thad reverted to his original system. He realized he needed to raise menu prices significantly more than he realized to make the no-tipping model viable. He asked his servers what they thought and 100% said they preferred the previous method – and managers did, too.

“I wanted to listen to my employees,” he said. “I felt it was irresponsible not to take their opinion under consideration.”
Reimagining the Restaurant Business: The High Stakes of a No-Tipping Culture

How do we increase the professionalism of the restaurant industry?

Sabato emphasized that this debate is about so much more than tipping or not tipping; it’s about treating his staff like the professionals they are. “Tipping stood in our way,” he said.

Now servers are hired into the group at a 100, 200, or 300 level (300 being the most senior and successful). They’re given clear instructions about how they can progress through the ranks and grow professionally and financially. That kind of career path is shockingly rare in the restaurant industry.

In addition to career development, a regular, predictable salary also helps front-of-house employees find work-life balance. Sabato said USHG’s weekly revenue share allows work schedules to be more flexible for employees who have changes in their personal lives. Renee is committed to paying her staff enough to have a family and go on vacation.

She also pointed out that the majority of the industry isn’t small, owner-operated restaurants, it’s chains paying employees very little and making money at the top of the totem pole. “That’s shameful,” she said, hoping that these wage changes will eventually spread throughout the larger industry.

And from a business owner’s perspective? “You charge what you need to be a viable business,” said Renee.

“You’ve got to pay your own mortgage, your staff, your taxes, your bank if you have a loan,” said Thad. “You’ve got to pay your investors something. It costs what it costs.”

He noted an “obsession” with making restaurant costs appear lower than they really are, saying that causes the industry to grind certain categories of employees, including immigrants and high school-educated line cooks. “It’s great that consciousness is being raised about that.”

Sabato pointed out that today’s restaurant guests are educated about where their food is sourced and sustainability. This is the next step: understanding how the people making their food are taken care of.

What does it take to change a business and a culture?

When Thad shifted his restaurants to a no-tipping model, he raised prices by a little more than 20% to represent the tip revenue. That was his biggest mistake, he said: not realizing that to retain staff he’d need to raise prices by another 20%, closer to what USHG has done.

He did, however, see an improvement in his bottom line once he had more control over how he paid his staff. Everything left over in the labor budget after salary and wages got paid out as a bonus.

“I’m all for it in principle,” he said of eliminating tips. “But on some level I’m in the restaurant business to innovate with food and service, not because I’m an accountant. It’s insanity to reinvent capitalism while trying to work a $3 million business with a 1.5% margin in a city where you have to pay health care and minimum wage.”

He was spending so much time in his small, independent restaurant business trying to reinvent the culture of the restaurants and figure out revenue models – not to mention being the initial face of the no-tipping movement on a national scale – that he wasn’t able to serve his investors and staff in other ways. But he thinks an established restaurant group like USHG, with accounting team members who can commit to the work full time, has a good chance of success.

Additionally, there’s the restaurant culture to consider. As Kevin pointed out, great servers want to win. Thad compared a busy night of service to theater, and after eliminating tips it was hard to get the same enthusiasm about the night (people were paid every two weeks instead of walking away with $300). For the professionalism of the industry that thinking probably needs to evolve, but it won’t go away overnight.

In principle, Thad supports a no-tipping model and is still open to exploring it. He believes it can work. But after talking about it at length to peers in local restaurants and being the first to take the plunge, he was surprised to find himself alone.

“We were and remain enthusiastic, but no one is interested in doing it,” he says. “But we’re not interested in being the only one again.” He pointed out that Chez Panisse and other restaurants have had service-included models for some time, but despite all the recent discussion, the movement of the needle has actually been small and slow.

This year USHG will reopen its flagship restaurant, Union Square Café, with Hospitality Included, forcing themselves to challenge every assumption along the way. “What would we do if tipping never existed?” asked Sabato. “It unravels everything: how we recruit, incentivize, retain, and grow. We have to ask — is that the best way?”

Photo Credit: Liz Clayman; Union Square Hospitality Group