By: Daniel Galan

Whether a friend or family member, everybody knows a person that has worked as a wait staff employee. In the United States, wait staff employees are at the mercy of customer discretion in the amount of tip received. Under the Fair Labor Standards Act, “tipped employees are those who customarily and regularly receive more than $30 per month in tips.”[1] Federal law mandates that tipped employees be paid at least $2.13 per hour.[2] Beyond the $2.13 per hour minimum wage, states have wide latitude in setting the minimum wage rates for tipped employees.[3] In California, the minimum wage rate for tipped employees is $9.00 per hour[4], however, California is the exception and not the rule. In fact, twenty-five states allow the minimum wages of tipped employees’ to be less than $3.00 per hour.[5]

The custom of tipping was not always as popular in the U.S. as it is today.  Between 1909 and 1918, seven states passed anti-tipping laws.[6] Scholars have argued that tipping is undesirable because it facilitates prejudice, tax evasion, income inequality and negative externalities.[7] However, the legislative movement towards abolishing tipping is dead given the continued prevalence of tipping in American society.

Danny Meyer, creator of shake shack and CEO of Union Square Hospitality Group, seems to agree with the negative sentiments surrounding tipping and he’s not waiting for legislative action. Earlier this week, Meyer announced the bold initiative of eliminating tips at Gramercy Tavern, Union Square Café.[8] Mr. Meyer believes that the tipping structure in American restaurants is inherently unfair, “[i]t’s a very odd American tradition that we think is an anachronism–that thousands of dining patrons have a better bead on what a server should be paid, or what a cook should be paid, than we do.”[9] In order to offset the average 21% tip, restaurants eliminating tips will need to increase menu prices by 20%-25%.[10] The elimination of tips would increase the wages of servers, hosts, and other staff that does not get tipped out.[11] Not everybody is thrilled with Mr. Meyer’s ingenuity, Melissa Fleischut, president and chief executive of the trade group New York State Restaurant Association, speculates that many restaurants will not be able to eliminate tips because their customers won’t tolerate higher prices.[12]

While the practice of tipping has been around for hundreds of years, there is evidence that suggests that it does not actually accomplish what it sets out to–incentivizing employees to do a better job.[13] Furthermore, restaurant owners may stand to benefit by eliminating tips from a compliance standpoint. Restaurants’ abolishing the tip system eliminates the need to comply with the Fior D’Italia rule, which enables the IRS to conduct additional audits on businesses employing tipped employees.[14] Meyer is not the first CEO to consider eliminating tips, but Gramercy Tavern is the most recent high profile example of a potentially growing trend within the restaurant industry.

[1] U.S. DOL, Wage and Hour Division, Fact Sheet #15: Tipped Employees Under the Fair Labor Standards Act (2013), http://www.dol.gov/whd/regs/compliance/whdfs15.pdf.

[2] Id.

[3] U.S. DOL, Wage and Hour Division, Minimum Wages for Tipped Employees (December 2014), http://www.dol.gov/whd/state/tipped.htm.

[4] Id.

[5] Id.

[6] Ian Ayres, Fredrick E. Vars & Nasser Zakariya, To Insure Prejudice: Racial Disparities in Taxicab Tipping, 114 Yale L.J. 1613, 1660 (2005).

[7] Yoram Margalioth, The Social Norm of Tipping,the social norm of tipping, Its Correlation with Inequality, and Differences in Tax Treatment Across Countries, 11 Theoretical Inq. 561, 581 (2010).

[8] Pete Wells, Danny Meyer Restaurants to Eliminate Tipping, N.Y. Times, Oct. 14, 2015, http://nyti.ms/1RHILNE.

[9] Corinne Ramey, Danny Meyer’s Union Square Hospitality to Eliminate Tipping at Its Restaurants, Wall St. J., Oct. 14, 2015, http://www.wsj.com/articles/danny-meyerss-union-square-hospitality-to-eliminate-tipping-at-its-restaurants-1444839158.

[10] Id.

[11] Talia Ralph, Who Danny Meyer Is Helping By Eliminating Tipping At His Restaurants, Forbes, Oct. 14, 2015, http://www.forbes.com/sites/taliaralph/2015/10/14/who-danny-meyer-is-helping-by-eliminating-tipping-at-ushg/. (follow “search: talia ralph who danny meyer is helping by eliminating tipping at his restaurants” hyperlink).

[12] Id.

[13] Michael Lynn, Restaurant tipping and service quality: A tenuous relationship, 42(1) Cornell Hotel and Restaurant Administration Quarterly 14, 18 (2001), http://scholarship.sha.cornell.edu/articles/113/.

[14] Harold S. Peckron, TIP POLICE: AFTERMATH OF THE FIOR D’ITALIA RULE, 52 Cath. U. L. Rev. 1, 33 (2002).

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