The Limitations Of American Restaurants’ No-tipping Experiment

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In 2016, when the Danish restaurateur Claus Meyer opened his new-Nordic restaurant Agern inside New York City’s Grand Central Terminal, he decided that, in adherence to Danish tradition, the restaurant would not accept gratuities.

Instead, Meyer set Agern’s prices high enough to be able to pay employees a living wage and provide them with benefits such as health insurance, matching 401(k)s, and paid parental leave—practices that are all but unheard of in the restaurant industry. Earlier this month, though, Meyer announced that Agern would abandon that so-called hospitality-included model in favor of a traditional tipping system, and that menu prices would decrease accordingly. In an e-mail, he told me that he felt that the policy had alienated certain diners and driven away needed business. “The wellbeing of our staff remains crucial to our corporate mission,” Meyer wrote, emphasizing that the restaurant’s progressive employee benefits would remain in place.

Meyer is not the first restaurant owner who has tried, and failed, to challenge the American tipping custom. Over the past five years, dozens of restaurants have experimented with alternatives, including the popular Seattle restaurants Dahlia Lounge and the Walrus and the Carpenter; Bar Agricole, in San Francisco; and all eleven New York restaurants in Danny Meyer’s Union Square Hospitality Group. (A Reddit thread on the subject lists more than two hundred establishments in North America that do not currently accept tips.) In the past two years, though, many have quietly returned to accepting gratuities. The casual-dining chain Joe’s Crab Shack tried eliminating tipping at eighteen of its locations in 2015, only to restore the practice at fourteen of them half a year later. Bar Agricole has reinstated tipping, as have Le Pigeon and Little Bird, in Portland, Oregon. In New York, David Chang opened Momofuku Nishi as a gratuity-free establishment, in January, 2016, but by the time summer came around he had decided to accept tips. Tom Colicchio also experimented with a gratuity-included model during lunch services at Craft, but he gave it up after a year. Some restaurant owners have cited trouble attracting and retaining front-of-house staff as the reason for their change of course, but the most common explanation has been the same as Claus Meyer’s: losing tips meant losing business.

Before 2013, only a few of America’s roughly three hundred thousand full-service restaurants included gratuity in the price of a meal, almost all of them very high-end establishments, such as the French Laundry, in Yountville, California, and Alinea, in Chicago. Tipping seemed like a natural, and inevitable, system for compensating service employees, and for Americans travelling abroad its absence was a source of creeping discomfort. (“So are we really going to leave . . . nothing?”) But, as some of the restaurateurs who’ve eliminated the practice have pointed out, there is reason to question both tipping’s economic efficiency and its contribution to social welfare. Research conducted by Michael Lynn, at Cornell University, who is the foremost academic authority on tipping, has shown that people of color receive lower tips than their white colleagues, which arguably qualifies tipping as a discriminatory pay practice. The system perpetuates sexual misconduct, because service workers feel compelled to tolerate inappropriate behavior from customers who hold financial power over them. As restaurant prices have risen, so, too, have gratuities, to the point where there is now a substantial and hard-to-defend disparity between the pay of kitchen workers, who prepare food, and servers, who deliver it. It is perhaps telling that countries in which tipping is a social norm also tend to experience higher levels of corruption; what’s the real distinction, after all, between a tip and a bribe?

On top of all that, better service does not seem to beget higher gratuities, which is supposedly the system’s whole point. A statistical model created by Ofer Azar, at the Ben-Gurion University of the Negev, found only a small correlation between tip size and service quality, leading him to conclude that servers were motivated mainly by other factors (such as opportunities for professional advancement or—wild idea—simply the satisfaction of doing a good job). Another study by Lynn showed that perceived service quality affected tip size by less than two percentage points. A female server, by contrast, can expect to hike her tips by an average of seventeen per cent if she wears a flower in her hair.

Restaurants that decide to eliminate tipping typically raise menu prices in order to cover the cost of paying their staff members a substantially higher base wage, or else they add an automatic service charge for the same purpose. In either case, the increase is usually less than twenty per cent—Joe’s Crab Shack hiked prices by just twelve to fifteen per cent—so that customers will end up paying around the same price for a meal that they would under a tipping system. Restaurant owners can use this new pool of revenue to provide their employees with benefits, such as health-care coverage, retirement plans, and paid family leave, in addition to boosting pay for kitchen workers. This means that servers often receive new employment benefits as a result of the transition but that their cash earnings may shrink. One can understand why some decide to leave. The backlash from restaurant patrons is somewhat more surprising. The cost of their meal should be about the same, with fewer steps in the payment process and no post-prandial math. So why should no-tipping establishments lose business?

New research by Lynn shows that when restaurants move to a no-tipping policy, their online customer ratings fall. One factor that explains that dissatisfaction is how we, as consumers, respond to “partitioned” prices versus “bundled” prices. A partitioned price divides the total cost of an item into smaller components—say, a television listed for a hundred and ninety dollars that has a ten-dollar shipping fee. A bundled price would list the television, shipping included, for two hundred dollars. Consumers tend to perceive partitioned prices as cheaper than bundled ones. Lynn says that a customer who routinely tips fifteen per cent will see a gratuity-included restaurant as more expensive than a traditional restaurant with menu prices fifteen per cent lower. “In fact, a customer who routinely tips twenty per cent”—making her total bill higher than the gratuity-included alternative—“will still view the no-tipping restaurant as more expensive,” Lynn told me.
Lynn found that online customer ratings fell even more dramatically when restaurants instituted a mandatory service charge. People don’t like price hikes, he said, but they accept the logic of a restaurant taking on responsibility for its employees’ full wages and pricing its goods accordingly. They hate service charges. The underlying issue is that, while it is strongly encouraged by social norms, tipping is still notionally optional; being automatically billed for it feels like a “gotcha” moment. Lynn’s research also shows that customers expect inferior service from no-tipping establishments—which biases their views of the service they receive.

In Lynn’s study of online customer ratings, mid-scale restaurants suffered more after instituting no-tipping policies than upscale ones, where, he hypothesizes, customers are less price-sensitive. This suggests that, for the time being, success with tip-free programs may be restricted to the very high end. But that won’t necessarily stop other restaurants from trying. Despite the ethical virtues associated with going tipless, restaurant owners’ primary motivation to do so is likely financial. Minimum wage is rising across the country. If the tipping system remains, restaurants will have no choice but to raise menu prices in order to pay their staff. Servers will then double-dip, so to speak: they will benefit from a higher base wage while their tips—which are tied to sales, as a percentage—also increase, as menu prices climb. In other words, the best way for restaurants to keep prices low is to eliminate tipping. The biggest thing holding them back is customers’ suspicion that doing so is a ripoff.

By Elizabeth Dunn
February 24, 2018
Source: The New Yorker